PENSION BENEFIT GUARANTY CORPORATION

Performance and Accountability Report

Fiscal Year 2005

November 15, 2005

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2005 Annual Performance and Accountability Report

The Pension Benefit Guaranty Corporation (PBGC or the Corporation) is a federal corporation

established under the Employee Retirement Income Security Act (ERISA) of 1974, as amended. It

currently guarantees payment of basic pension benefits earned by 44.1 million American workers and

retirees participating in 30,330 private-sector defined benefit pension plans. The Corporation receives

no funds from general tax revenues. Operations are financed largely by insurance premiums paid by

companies that sponsor defined benefit pension plans and by investment income and assets from

terminated plans. The following constitutes PBGC’s annual performance and accountability report for

fiscal year 2005, as required under OMB Circular No. A-11, Section 230-1.

Contents

FINANCIAL STATEMENT HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ACTUARIAL VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

REPORT OF THE INSPECTOR GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ANNUAL PERFORMANCE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

FINANCIAL SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

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(Dollars in millions) 2005 2004

SINGLE-EMPLOYER AND MULTIEMPLOYER PROGRAMS COMBINED

Summary of OperationsPremium Income $ 1,477 $ 1,485

Losses from Plan Terminations $ 3,954 $ 14,707 Investment Income $ 3,976 $ 3,251

Actuarial Charges and Adjustments $ 490 $ 1,788

Insurance ActivityBenefits Paid $ 3,686 $ 3,007

Retirees 682,820 518,220 Total Participants Receiving or Owed Benefits 1,296,000 1,061,000

New Underfunded Terminations 120 192

Terminated/Trusteed Plans (Cumulative) 3,595 3,479

Financial Position

SINGLE-EMPLOYER PROGRAM

Total Assets $ 56,470 $ 38,993

Total Liabilities $ 79,246 $ 62,298 Net Incom e (Loss) $ 529 $ (12,067)

Net Position $(22,776) $ (23,305)

MULTIEMPLOYER PROGRAM

Total Assets $ 1,160 $ 1,070

Total Liabilities $ 1,495 $ 1,306

Net Incom e (Loss) $ (99) $ 25 Net Position $ (335) $ (236)

FINANCIAL STATEMENT HIGHLIGHTS

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FINANCIAL STATEMENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

General

The Pension Benefit Guaranty Corporation (PBGC) is mandated under Title IV of the

Employee Retirement Income Security Act of 1974 (ERISA) to insure, under statutory limits,

participants in covered private defined benefit pension plans in the United States. As of

September 30, 2005, the PBGC covered 44.1 million workers in over 30,000 active plans and was

directly responsible for the future benefits of 1.3 million active and retired workers whose plans had

failed. The PBGC receives no taxpayer monies and its obligations are not backed by the full faith

and credit of the United States Government.

The following is a discussion and analysis of the financial statements and other statistical

data that management believes will enhance the understanding of the PBGC’s financial condition

and results of operations. This discussion should be read in conjunction with the financial

statements beginning on page 17 and the accompanying notes.

For financial statement purposes, the PBGC divides its business activity into two broad areas

– Underwriting Activity and Financial Activity – covering both single-employer and multiemployer

program segments. Underwriting Activity consists of the provision of financial guaranty insurance to

the sponsors of defined benefit pension plans in return for insurance premiums. Actual and

expected probable losses that result from the termination of underfunded pension plans are included

in this category, as are actuarial adjustments based on changes in actuarial assumptions, such as

mortality. Financial Activity consists of the performance of PBGC’s assets and liabilities. PBGC’s

assets consist of premiums collected from defined benefit plan sponsors, assets from distress or

involuntarily terminated plans that the PBGC has insured, and recoveries from the former sponsors

of those terminated plans. The PBGC’s future benefit liabilities consist of those future benefits,

under statutory limits, that the PBGC has assumed following distress or involuntary terminations.

Gains and losses on PBGC’s investments and changes in the value of PBGC’s future benefit

liabilities (e.g., actuarial charges such as changes in interest rates and passage of time) are included in

this area.

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Overview of Financial Results

• Between its single-employer and multiemployer programs, the PBGC’s combined net

position at September 30, 2005, was $(23.1) billion as compared to $(23.5) billion at

September 30, 2004. The combination of a reduction in liabilities due to the positive

increase in interest factors and the continued strong investment returns offset the losses

incurred and the administrative expenses of the Corporation.

• The combined net gain of $0.4 billion for 2005 was driven primarily by $1.5 billion in

new premiums, $2.9 billion in favorable asset and liability revaluations due to changes in

interest rates, $0.8 billion in net investment returns in excess of charges for the passage

of time, offsetting the new charges of $4.7 billion for new probable terminations.

• During 2005, the PBGC terminated 120 plans in the single-employer program

representing a total of $10.5 billion in assets, including estimated recoveries, and $21.2

billion of future benefit liabilities (representing losses of $10.7 billion). These plans had

an average funded ratio of approximately 50%. All but $0.3 billion of the terminated

amounts (including those not previously recorded as probables as well as any

revaluation of the probables that terminated) had been accrued in PBGC’s results as of

the end of 2004.

• During 2005, the PBGC also significantly increased its securities lending program

adding approximately $6.3 billion to both Cash and cash equivalents and Payable upon

return of securities loaned.

• The PBGC’s future exposure to new probable terminations remains high in 2005 with

approximately $108 billion in underfunding exposure to plan sponsors, classified as

reasonably possible, whose credit ratings are below investment grade or meets one or

more financial distress criteria.

• Overall benefit payments increased to $3.7 billion commensurate with the 235,000

person increase in the numbers of persons owed benefits.

• Events subsequent to September 30, 2005, would have reflected a decrease of $2.9

billion in Net income and a decrease in the Net position in the same amount had these

conditions occurred prior to year-end.

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Financial and Program Risks

PBGC’s operating results are subject to significant fluctuation from year to year depending

on the severity of losses from plan terminations, changes in the interest factors used to discount

liabilities, investment performance, general economic conditions and other factors such as changes

in law. PBGC’s operating results differ from those of most private insurers, especially in their

variability. PBGC provides mandatory insurance of catastrophic risk. Most private insurers are able

to diversify or reinsure their catastrophic risks or to apply traditional insurance underwriting

methods to these risks. PBGC’s risks are concentrated in certain industries, and the Corporation is

not able to decline providing insurance coverage regardless of the potential risk of loss posed by an

insured. Private insurers are able to adjust premiums in response to actual or expected claims

exposure. In contrast, PBGC’s premiums are fixed by statute.

PBGC operated for several years with low levels of claims and then experienced a period of

record-breaking claims from FY 2002 through FY 2004. PBGC’s future results will depend on the

infrequent and unpredictable termination of a limited number of very large pension plans. PBGC’s

financial condition is also sensitive to market risk such as interest rates and equity returns, which can

also be highly volatile.

Recent Developments

In 2005, companies sponsoring underfunded pension plans filing under section 4010 of

ERISA, reported a record shortfall of $353.7 billion in their latest filings with the PBGC. This

represents a 27% increase over the $279.0 billion in underfunding reported a year earlier. The 2005

statistics are based on 2004 information that 1,108 plans filed with the PBGC covering about 15

million workers and retirees. These underfunded plans had $786.8 billion in assets to cover more

than $1.14 trillion in liabilities, for an average funded ratio of 69 percent. The filings under ERISA

section 4010 are required only of companies with more than $50 million in unfunded pension

liabilities. As of September 30, 2005, the PBGC estimated that the total shortfall in all insured

pension plans exceeded $450 billion. This amount, in total, represents no change from our estimate

as of September 30, 2004, but the amount is now concentrated among larger plans.

In late September 2005, the Congressional Budget Office (CBO) issued a report projecting

that the ten year losses to the PBGC could grow significantly based on the underfunded status of

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many plan sponsors whose defined benefit plans the PBGC guarantees and exposures they have

taken on in their own portfolios. These levels of loss, the CBO observed, would likely exceed the

ability of the other private defined benefit plan sponsors in the system to cover those losses through

higher premiums, raising the prospect of either the need for general taxpayer assistance or the loss

of insured participant benefits.

The CBO report, Government Accountability Office’s reports, and others like them

have helped to describe the need for pension reform legislation, which could have a material effect

on PBGC’s future finances. Provisions in several bills include increases in premiums that would

strengthen PBGC’s financial position as well as changes that may increase exposure to PBGC due to

plan failures that may weaken the PBGC’s financial position. The prospects for any legislation are

uncertain.

Discussion of Insurance Programs

PBGC operates two separate insurance programs for defined benefit plans involving both

the underwriting and financial activity areas of the business. PBGC’s single-employer program

guarantees payment of basic pension benefits when underfunded plans terminate. PBGC’s

multiemployer program is funded and administered separately from the single-employer program.

The event triggering PBGC’s multiemployer guarantee is the inability of a covered plan to pay

benefits when due at the guaranteed level, as opposed to plan termination as required in the single-

employer program. The financial condition, results of operations, and cash flows of these two

programs are reported as different business segments because the programs are separate by law.

Single-Employer Program

The single-employer program covers about 34.2 million workers and retirees in about 28,800

plans, down from the all time high of 34.6 million workers in 2004. In addition, PBGC oversees the

terminations of fully funded plans and guarantees payment of basic pension benefits when

underfunded plans are terminated. When a covered underfunded plan terminates, PBGC becomes

trustee of the plan and administers future benefit payments.

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RESULTS OF ACTIVITIES AND TRENDS: Large claims against the single-employer program

continued in FY 2005 although charges related to new probable terminations decreased from the

previous year. The losses incurred from plan terminations were offset by the effects of increasing

interest rates and investment returns resulting in a net gain in 2005 of $529 million compared to a

net loss in 2004 of $12.067 billion. The $12.596 billion year to year change in net income was

primarily attributable to decreases of (1) $10.753 billion in losses from completed and probable

terminations (see Note 10), (2) $1.305 billion in actuarial adjustments, due to a one time change in

mortality assumptions in 2004 that were not repeated in 2005, and (3) an increase in investment

income of $700 million, partially offset by an increase in administrative and other expenses of $161

million.

Actuarial charges and adjustments arise from gains and losses from mortality and

retirement assumptions, changes in interest factors, and passage of time (due to the annual

shortening of the discount period covering future benefits). It is important to note that the ability of

PBGC’s assets to counter the two primary actuarial charges, i.e., passage of time and changes in

interest factors, will be increasingly constrained by PBGC’s deficit.

In 2005, PBGC’s assets outperformed its liabilities and have for seven of the last ten years

as a result of strong equity returns and/or the favorable effect due to changes in interest rates.

There is no assurance that these results will continue.

The growth in liabilities due to the passage of time cannot ordinarily be offset when the

PBGC’s assets are significantly lower than its liabilities and when the yields are similar. The effect of

exposure to interest rate risk can be mitigated with a dollar duration asset/liability matching strategy,

even with a moderate deficit. Should the deficit increase, dollar duration matching will require use

of increasingly long dated fixed-income instruments or other means, such as interest rate swap

contracts.

Underwriting Activity: PBGC’s single-employer program experienced a net underwriting loss of

$3.067 billion in 2005, a significant improvement from the loss of $14.977 billion in 2004. This

$11.910 billion year to year improvement was primarily due to a significant drop in losses from new

and remaining probables, as well as the year to year decrease in the 2004 underwriting actuarial

adjustment (charge) of $1.305 billion. The change in actuarial adjustments is primarily attributable

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to the implementation of a 2004 mortality study performed by PBGC. The study improved PBGC’s

accuracy in projecting its mortality experience as described more fully under Note 4 of the financial

statements.

Underwriting income slightly increased from $1.482 billion to $1.495 billion due to an

increase in other income, consisting of interest income on recoveries from sponsors, from $24

million in 2004 to $44 million in 2005. Premium income from plan sponsors decreased slightly from

$1.458 billion in 2004 to $1.451 billion in 2005.

Annual flat-rate premiums for the single-employer program are $19 per participant and

income remained fairly constant for 2005, with a total of approximately $644 million. Annual

Variable Rate Premiums (VRP) paid by underfunded single-employer plans at a rate of $9 per $1,000

of underfunding if not exempt (e.g., meets certain minimum funding requirements) did not increase,

with a total of $787 million. Premium receivables actually fell, however, because more plans were

exempt from paying VRP than was the case in the previous year.

The Required Interest Rate (RIR) used in calculating underfunding for purposes of determining

a VRP has traditionally been 85 percent of the annual yield on 30-year Treasury securities; however,

temporary legislation in 2004 changed the basis for plan years beginning in 2004 and 2005 to 85 percent

of a composite corporate bond yield. The resulting rates for calendar-year plans for 2004 and 2005 were

4.94% and 4.73%, respectively. The rates for non-calendar year plans were also somewhat lower for

2005 than for 2004. Although a decrease in the RIR generally leads to increases in VRP premiums,

the premium income accruals for plan year 2005 were lower overall. This is primarily due to more

plans meeting the VRP exemption requirements, termination of large plans with prior year VRP

payments and other factors in the actuarial calculation of underfunding.

The Corporation’s losses from completed and probable plan terminations decreased from a

loss of $14.707 billion in 2004 to a loss of $3.954 billion in 2005. This decrease was primarily due to

the fact that the losses for many of the plans that terminated in 2005 had already been recorded as

probable as of the end of 2004. Additional plans did become probable and were recorded as new

losses in 2005; however the amounts of such new probable claims were lower in 2005 than for the

comparable period in 2004. Though additional plans became probable in 2005, the new net claim

amounts were much lower than in 2004.

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In the liabilities section of the Statements of Financial Condition, most of the decrease in

claims for probable terminations was due to the transfer of those probables to pending termination

or trusteed status. The net claim as of September 30, 2005, is $10.5 billion, while the net claim as of

September 30, 2004, was $16.9 billion. This $6.4 billion reduction resulted primarily from the

transfer of $10.6 billion (see Note 4) of previously accrued claims to pending termination and

trusteeship or trusteed, offset by the addition of new probable claims $4.7 billion. The amount of

future losses remains unpredictable as PBGC’s loss experience is highly sensitive to losses from large

claims.

Administrative expenses increased $48 million from $263 million in 2004 to $311 million in

2005 due to expenses incurred in both one-time costs of managing large bankruptcy cases as well as

higher ongoing expenses to administer recently terminated airline pension plans in 2005. The FY

2005 expense of $77 million in Other expenses was due to the write-off of premium accounts

receivable of $38 million and the write-off of $39 million of expected recoveries from sponsors of

terminated plans.

Financial Activity: Single-employer financial net income increased from $2.910 billion in 2004 to

$3.596 billion in 2005. This improvement was primarily due to an increase in investment income of

$700 million and combined actuarial charges that were essentially flat over 2004. Actuarial charges

under Financial activity represent the effects of changes in interest rates and the passage of time on

the present value of future benefits. In 2005, passage of time charges increased due to the increase

in PBGC’s liabilities from newly trusteed plans and an increase in PBGC discount factors. This was

substantially offset by the decrease in the present value of PBGC’s liabilities due to an increase in the

applicable discount factors.

The PBGC discounts its liabilities for future benefits with interest factors that, together with

the mortality table used by PBGC, will approximate the price in the private-sector annuity market at

which a plan sponsor or PBGC could settle its obligations. PBGC surveys life insurance industry

annuity prices through the American Council of Life Insurers (ACLI) to obtain input needed to

determine interest factors and then derives interest factors that will best match the private-sector

prices from the surveys. The interest factors are often referred to as select and ultimate interest

rates. Any pair of interest factors will generate liability amounts that differ from the survey prices,

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which cover 14 different ages or benefit timings. The PBGC process derives the interest factor pair

that differs least over the range of prices in the survey. PBGC’s select interest factor (which

operates over the first 25 years) increased to 5.2% at September 30, 2005, from 4.8% at September

30, 2004. The ultimate factor (which is applied for all years after the first 25) decreased from 5.0%

to 4.5% over the same period.

The total return on investments was 8.9% in 2005, generating $3.897 billion in investment

income, compared to 8.0% in 2004 and $3.197 billion of income. Equity investments within the

single-employer program returned 15.6% in 2005. There was a slight decrease of $82 million in

equity income compared to 2004. In 2004, PBGC had a significantly higher amount of equities

from trusteed plans (which were liquidated near the end of the fiscal year) which accounts for the

higher level of equity income in 2004. Fixed-income investments within the single-employer

program returned 6.6% in 2005 which resulted in an increase of $772 million in fixed income in

2005 from 2004. In 2005, PBGC’s investments outperformed its liabilities by $3.596 billion. PBGC

marks its assets to market.

Multiemployer Program

A multiemployer plan is a pension plan sponsored by two or more unrelated employers who

have signed collective bargaining agreements with one or more unions. Multiemployer plans cover

most unionized workers in the trucking, retail food, construction, mining and garment industries.

Multiemployer plans are one of the major vehicles that provide defined benefit pensions to workers

in the unionized sectors of the economy. The multiemployer program, which covers about 9.9

million workers and retirees (up from 9.8 million covered workers in 2004) in about 1,600 insured

plans, differs from the single-employer program in several significant ways. For such plans, the

event triggering PBGC’s guarantee is the inability of a covered plan to pay benefits when due at the

guaranteed level (insolvency). Unlike the single-employer plans, the PBGC does not become trustee

of multiemployer plans; rather, it provides financial assistance through loans to insolvent plans to

enable them to pay guaranteed benefits. During fiscal 2005, PBGC paid out $13.8 million in

financial assistance to 29 insolvent plans. Once begun, these loans (which are typically not repaid)

generally continue year after year until the plan no longer needs assistance or has paid all promised

benefits. For a worker with 30 years under a plan, the maximum annual benefit guarantee is

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$12,870. Multiemployer premium rates are significantly lower than for the single-employer program.

Annual flat-rate premiums for the multiemployer program are $2.60 per participant and there are no

variable-rate premiums.

RESULTS OF ACTIVITIES AND TRENDS: The multiemployer program reported a net loss of

$99 million in FY 2005 compared to a gain of $25 million in FY 2004. This resulted in a negative

net position of $335 million in FY 2005 compared to a negative net position of $236 million in FY

2004. The change in net income was primarily due to the increase in loss from future financial

assistance of $149 million offset by an increase in investment income of $25 million.

The multiemployer program reported a net loss from underwriting activity of $178 million in FY

2005 compared to a net loss of $29 million in FY 2004. This change in the net loss of $149 million was

attributed to the increase in losses from financial assistance of $149 million (due to the addition of eleven

plans to the multiemployer probable inventory and changes in data) and by the decrease in premium

income of $1 million, offset by a decrease in actuarial adjustments of $1 million. Financial activity

reflected financial income of $79 million from earnings on fixed income investments in 2005, compared

to $54 million in 2004. Multiemployer program assets at year-end are invested 97.8 percent in Treasury

securities and were invested 97.4 percent in Treasury securities in 2004.

Overall Capital and Liquidity

PBGC’s obligations include monthly payments to participants and beneficiaries in terminated

defined benefit plans, financial assistance to multiemployer plans, and the operating expenses of the

Corporation. The financial resources available to pay these obligations are underwriting income

received from insured plan sponsors (largely premiums), the income earned on PBGC’s investments,

and the assets taken over from failed plans.

In 2005, PBGC’s cash receipts from operations of the single-employer program improved

somewhat but were still insufficient to cover its operating cash disbursements of $3.630 billion, resulting

in net cash used of $189 million, compared to $732 million used in 2004. The multiemployer program

experienced positive cashflow of $75 million in 2005 compared to $81 million in 2004.

Combined premium receipts totaled $1.6 billion in FY 2005, an increase of approximately $500

million. Most of this increase pertained to premiums that were largely accrued as income in FY2004 but

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actually paid in FY 2005. In 2005, net cash flow provided from investments was $1.3 billion versus $5.2

billion in 2004.

For FY 2006, PBGC estimates $4.4 billion in single-employer benefit payments and $87 million

in financial assistance payments to multiemployer plans. The FY 2006 President’s Budget request

includes $297 million for PBGC’s administrative expenses though a heavy workload will likely require

additional funds for this activity. After workload related reapportionments, PBGC’s expenses for 2005

were $342 million.

The PBGC is a self-financing government corporation funded by premiums and the assets of

plans it trustees, not general tax revenues. Unlike other Federal programs, which rely on annual

appropriations for funding and spending authority, ERISA gives PBGC its spending authority.

Pursuant to Office of Management and Budget (OMB) policy, PBGC spending is reviewed by

Department of Labor (DOL), approved by OMB, and remains subject to Congressional oversight.

In 2006, underwriting income and investment gains or losses will be influenced by significant

factors beyond PBGC’s control (including changes in interest rates, financial markets, contributions

made by plan sponsors as well as possible statutory changes currently under consideration). Absent a

change in law, PBGC’s best estimate of 2006 premium receipts ranges between $1.2 billion and $1.5

billion. No estimate is made of 2006 investment income.

As of September 30, 2005, the single-employer and multiemployer programs reported deficits of

$22.776 billion and $335 million, respectively. The single-employer program had assets of nearly $56.5

billion which is offset by total liabilities of $79.2 billion, which includes a total present value of future

benefits (PVFB) of approximately $69.7 billion. As of September 30, 2005, the multiemployer program

had assets of approximately $1.2 billion offset by approximately $1.5 billion in present value of

nonrecoverable future financial assistance.

Notwithstanding these deficits, the Corporation has sufficient liquidity to meet its obligations for

a number of years; however, neither program at present has the resources to fully satisfy PBGC’s long-

term obligations to plan participants.

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Single-Employer and Multiemployer Program Exposure

Measures of risk in PBGC’s insured base of plan sponsors suggest that there may continue to be

large claims against the single-employer pension insurance program. PBGC’s best estimate of its loss

exposure to underfunded plans sponsored by companies with credit ratings below investment grade and

classified by PBGC as reasonably possible of termination as of September 30, 2005, was $108 billion.

The comparable estimates of reasonably possible exposure for 2004 and 2003 were $96 billion and $82

billion, respectively. These estimates are measured as of December 31 of the previous year (see Note 7).

For 2005, this exposure is concentrated in the following sectors: manufacturing; transportation,

communication and utilities; and services/other.

PBGC’s estimate of the total underfunding in single-employer plans continues to exceed $450

billion as of September 30, 2005 (see Note 1). PBGC’s estimate of underfunding as of September 30,

2005, is largely (about 80%) based upon employers’ reports to PBGC under section 4010 of ERISA of

their December 31, 2004, market value of assets and termination liability. These values were then rolled

forward to September 30, 2005, on a plan-by-plan basis using an average pension asset return from

published reports, an average benefit accrual increment, and a liability adjustment factor to reflect the

change in interest factors. The roll forward did not adjust for contributions, benefit payments, changes

in liabilities due to the passage of time, or plan amendments since this information was not readily or

reliably available. PBGC’s exposure to loss is less than these amounts because of the statutory limits on

insured pensions. For single-employer plans sponsored by employers that do not file with PBGC under

section 4010 of ERISA, PBGC’s estimates are based on data obtained from other filings and

submissions with the government and from corporate annual reports for comparable periods.

Total underfunding of multiemployer plans is estimated to exceed $200 billion at September 30,

2005 (see Note 1). In 2004, PBGC estimated multiemployer underfunding to exceed $150 billion.

Multiemployer plan data is much less current and complete than single-employer data - it is generally

two years older and in some cases three years older than single-employer data and comes only from

Form 5500 filings.

PBGC estimates that, as of September 30, 2005, it is reasonably possible that multiemployer

plans may require future financial assistance in the amount of $418 million. As of September 30, 2004

and 2003, these exposures were estimated at $108 million and $63 million, respectively.

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There is significant volatility in plan underfunding and sponsor credit quality over time, which

makes long-term estimates of PBGC’s expected claims difficult. This volatility, and the concentration of

claims in a relatively small number of terminated plans, have characterized PBGC’s experience to date

and will likely continue. Among the factors that will influence PBGC’s claims going forward are

economic conditions affecting interest rates, financial markets, and the rate of business failures.

Investment Activities

The Corporation’s investment assets consist of premium revenues, accounted for in the

revolving funds, and assets from terminated plans and their sponsors, accounted for in the trust funds.

By law, PBGC is required to invest the revolving funds in obligations issued or guaranteed by the United

States (i.e., Funds 1 and 2). Portions of the revolving fund can be invested in other debt obligations (i.e.,

Fund 7). Current policy is to invest these revolving funds only in Treasury securities. There are no

statutory limitations on the investment of trust funds and PBGC uses institutional investment

management firms to invest those assets, subject to PBGC oversight and consistent with the

Corporation’s investment policy statement.

As of September 30, 2005, the value of PBGC’s total investments in the single-employer and

multiemployer programs, including cash and investment income, net of $6.9 billion of cash collateral

from securities lending, was approximately $49.0 billion. This $6.9 billion of cash collateral is held

separately and is reported as part of PBGC’s total “Cash and cash equivalents” of $8.9 billion as of

September 30, 2005. The revolving fund’s value was $16.4 billion and the trust fund’s value was $32.6

billion. Cash and fixed-income securities represented about 75 percent of the total assets invested at the

end of the year, compared to 70 percent at the end of 2004. Equity securities represented about 25

percent of total assets invested, compared to 30 percent at the end of 2004. A very small portion of the

invested portfolio remains in real estate and other financial instruments.

During 2004, PBGC adopted a new investment policy to better manage the financial risks facing

the federal pension insurance program. Implementation of this policy will reduce balance sheet volatility

arising from a mismatch between assets and liabilities by (1) continuing to improve its dollar duration

match of invested assets to its future benefit liabilities (2) increasing investments in duration-matched

fixed-income securities and (3) decreasing the overall percentage of assets invested in equities to between

15 percent and 25 percent of total invested assets. In 2005, the PBGC continued the implementation of

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INVESTMENT PERFORMANCE

(Annual Rates of Return)

September 30, Five Years Ended 2005 2004 September 30, 2005

Total Invested Funds 8.9% 8.0% 5.1%

Equities 15.6 15.0 0.0Fixed-Income 6.6 5.6 8.8

Trust Funds 10.3 11.5 -1.2Revolving Funds 7.0 5.4 8.8

IndicesWilshire 5000 14.7 14.7 -0.5S&P 500 Stock Index 12.3 13.9 -1.5Lehman Brothers Long Treasury Index 6.9 4.9 8.7

PBGC Liability Return 2.6 0.5 N/A

its investment policy and also finalized a search for asset/liability fixed-income managers and allocated

funds to them. PBGC’s investment focus of limiting financial risk exposure arising from a mismatch of

the interest rate sensitivity of its assets and liabilities, in combination with the PBGC’s managed equity and

fixed income portfolios, contributed to the PBGC’s asset returns exceeding its liability returns by $3.6

billion.

PBGC’s trusteed liabilities were 69% matched on a dollar duration basis at year end. This means

that the aggregate interest rate sensitivity of its assets is less than the interest rate sensitivity of its liabilities.

Because the dollar duration of the assets improved during FY 2005, but is still currently less than the

dollar duration of the liabilities, the impact of the mismatch has been lessened yet still represents a residual

interest rate exposure for the Corporation. Also, PBGC’s ability to limit the volatility of its assets and

liabilities is also impacted by differences between PBGC’s discount factor rate-setting methodology used

to value PBGC’s liabilities, which is based on surveys of private sector annuity pricing, and market-based

interest rates, which are used to value PBGC’s assets. Over shorter periods, the different rates for valuing

assets and liabilities may, and have, varied significantly (relative to each other) due to the different

valuation methodologies. However, over longer periods such as a three to five year market cycle, the

variations may be less.

Results for 2005 were positive for capital market investments and PBGC’s investment activities.

During the year, PBGC achieved an

8.9% return on total invested funds

compared to its liability return of

2.6%. The liability return captures

the same components as the fixed

income total return calculation: i.e.,

interest income (the yield on

PBGC’s trusteed liabilities as

measured by the select and ultimate

factors) and capital changes in the

liability as measured by present

value calculations of the liability distribution based on changes in those same interest factors. It also

reflects the impact of changes updated on a quarterly basis to PBGC’s liability term distribution (i.e., long-

16

term benefit payment stream) as new plans of differing term structure are added. A positive liability return

implies an increase in PBGC’s liability. The effects of additional trusteed liabilities as they are added or

reduced from time to time is not a factor in liability return calculations just as fund additions and

withdrawals are not a factor in fixed income return calculations.

PBGC’s fixed-income program returned 6.6% while its equity program returned 15.6%. For the

year, PBGC reported income of about $1.8 billion from fixed-income investments and a gain of about

$2.1 billion from equity investments. PBGC’s total investment income of approximately $4.0 billion was

able to significantly offset PBGC’s $270 million actuarial charge. This was largely attributable to increases

in PBGC’s select (discount) factor, which reduced PBGC’s liabilities, while long-term market interest rates

declined, resulting in a gain in PBGC’s fixed-income investments. In addition, PBGC continued to

significantly benefit from strong equity returns.

Federal Managers’ Financial Integrity Act (FMFIA) Statement

Management controls in effect during fiscal year 2005 provided reasonable assurance that assets

were safeguarded from material loss and that transactions were executed in accordance with management’s

authority and with significant provisions of selected laws and regulations. Furthermore, PBGC

management controls provided reasonable assurance that transactions were properly recorded, processed

and summarized to permit the preparation of financial statements in accordance with accounting

principles generally accepted in the United States of America and to maintain accountability for assets

among funds.

PBGC did not identify any material weaknesses or material noncomformances as defined by

FMFIA during fiscal year 2005.

17

Management Representation

PBGC’s management is responsible for the accompanying Statements of Financial Condition of

the Single-Employer and Multiemployer Funds as of September 30, 2005 and 2004, the related Statements

of Operations and Changes in Net Position and the Statements of Cash Flows for the years then ended.

PBGC’s management is also responsible for establishing and maintaining systems of internal accounting

and administrative controls that provide reasonable assurance that the control objectives, i.e., preparing

reliable financial statements, safeguarding assets and complying with laws and regulations, are achieved.

In the opinion of management, the financial statements of the Single-Employer and

Multiemployer Program Funds present fairly the financial position of PBGC at September 30, 2005, and

September 30, 2004, and the results of their operations and cash flows for the years then ended, in

conformity with accounting principles generally accepted in the United States of America (GAAP) and

actuarial standards applied on a consistent basis.

Estimates of probable terminations, nonrecoverable future financial assistance, amounts due from

employers and the present value of future benefits have a material effect on the financial results being

reported. Litigation has been disclosed and reported in accordance with GAAP.

As a result of the aforementioned, PBGC has based these statements, in part, upon informed

judgments and estimates for those transactions not yet complete or for which the ultimate effects cannot

be precisely measured, or for those that are subject to the effects of any pending litigation.

The Inspector General engaged Clifton Gunderson LLP to conduct the audit of the Corporation’s

2005 financial statements, and PricewaterhouseCoopers LLP (PwC) to conduct the audit of the

Corporation’s 2004 financial statements. Clifton Gunderson issued an unqualified opinion on PBGC’s

September 30, 2005 financial statements and PwC issued an unqualified opinion on PBGC’s September

30, 2004 financial statements.

Bradley D. Belt James C. Gerber Executive Director Chief Financial Officer

November 9, 2005

18

PENSION BENEFIT GUARANTY CORPORATIONSTATEMENTS OF FINANCIAL CONDITION

Single-Employer

Program

Multiemployer

Program

Memorandum

Total September 30, September 30, September 30,(Dollars in millions) 2005 2004 2005 2004 2005 2004

ASSETS

Cash and cash equivalents $ 8,889 $ 7,692 $ 13 $ 14 $ 8,902 $ 7,706

Investments, at market (Note 3):

Fixed maturity securities 33,160 17,333 1,134 1,042 34,294 18,375

Equity securities 12,284 11,115 0 1 12,284 11,116

Real estate and real estate investment trusts 29 91 0 0 29 91

Other 25 23 0 0 25 23

Total investments 45,498 28,562 1,134 1,043 46,632 29,605

Receivables, net:

Sponsors of terminated plans 146 129 0 0 146 129

Premiums (Note 9) 425 619 0 1 425 620

Sale of securities 1,124 1,756 0 0 1,124 1,756

Investment income 359 213 13 12 372 225

Other 2 2 0 0 2 2

Total receivables 2,056 2,719 13 13 2,069 2,732

Capitalized assets, net 27 20 0 0 27 20

Total assets $56,470 $38,993 $1,160 $1,070 $57,630 $40,063

Th e accompanying no tes a re an in tegral p art o f these f inancial statem ents.

19

PENSION BENEFIT GUARANTY CORPORATIONSTATEMENTS OF FINANCIAL CONDITION

Single-Employer

Program

Multiemployer

Program

Memorandum

Total September 30, September 30, September 30,

(Dollars in millions) 2005 2004 2005 2004 2005 2004

LIABILITIES

Present value of future benefits, net (Note 4):

Trusteed plans $ 57,291 $ 43,344 $ 2 $ 3 $ 57,293 $ 43,347

Plans pending termination and trusteeship 1,918 501 0 0 1,918 501

Settlements and judgments 58 65 0 0 58 65

Claims for probable terminations 10,470 16,926 0 0 10,470 16,926

Total present value of future benefits, net 69,737 60,836 2 3 69,739 60,839

Present value of nonrecoverable future financial assistance (Note 5) 1,485 1,295 1,485 1,295

Payable upon return of securities loaned 6,939 637 0 0 6,939 637

Unearned premiums 210 223 8 8 218 231

Due for purchases of securities 2,290 531 0 0 2,290 531

Accounts payable and accrued expenses (Note 6) 70 71 0 0 70 71

Total liabilities 79,246 62,298 1,495 1,306 80,741 63,604

Net position (22,776) (23,305) (335) (236) (23,111) (23,541)

Total liabilities and net position $ 56,470 $ 38,993 $1,160 $1,070 $ 57,630 $ 40,063

The accompanying notes are an integral part of these financial statements.

Commitments and contingencies (Notes 7, 8, 14 and 15)

20

PENSION BENEFIT GUARANTY CORPORATIONSTATEMENTS OF OPERATIONS AND CHANGES IN NET POSITION

Single-Employer

Program Multiemployer

ProgramMemorandum

Total

For the Years Ended

For the Years Ended

For the Years Ended

September 30, September 30, September 30, (Dollars in millions) 2005 2004 2005 2004 2005 2004

UNDERWRITING

Income: Premium (Note 9) $ 1,451 $ 1,458 $ 26 $ 27 $ 1,477 $ 1,485

Other 44 24 0 0 44 24

Total 1,495 1,482 26 27 1,521 1,509

Expenses: Administrative 311 263 0 0 311 263

Other 77 (36) 0 0 77 (36)

Total 388 227 0 0 388 227

Other underwriting activity: Losses from completed and probable terminations (Note 10) 3,954 14,707 0 0 3,954 14,707

Losses from financial assistance (Note 5) 204 55 204 55

Actuarial adjustments (Note 4) 220 1,525 0 1 220 1,526

Total 4,174 16,232 204 56 4,378 16,288

Underwriting loss (3,067) (14,977) (178) (29) (3,245) (15,006)

FINANCIAL:

Investment income (Note 11): Fixed 1,755 983 79 54 1,834 1,037

Equity 2,114 2,196 0 0 2,114 2,196

Other 28 18 0 0 28 18

Total 3,897 3,197 79 54 3,976 3,251

Expenses: Investment 31 25 0 0 31 25

Actuarial charges (Note 4): Due to passage of time 2,618 1,881 0 0 2,618 1,881

Due to change in interest rates (2,348) (1,619) 0 0 (2,348) (1,619)

Total 301 287 0 0 301 287

Financial income 3,596 2,910 79 54 3,675 2,964

Net income (loss) 529 (12,067) (99) 25 430 (12,042)

Net position, beginning of year (23,305) (11,238) (236) (261) (23,541) (11,499)

Net position, end of year $(22,776) $(23,305) $(335) $(236) $(23,111) $(23,541)

The accompanying notes are an integral part of these financial statements.

21

PENSION BENEFIT GUARANTY CORPORATIONSTATEMENTS OF CASH FLOWS

Single-Employer

Program

Multiemployer

Program

Memorandum

Total For the Years Ended For the Years Ended For the Years Ended

September 30, September 30, September 30,(Dollars in millions) 2005 2004 2005 2004 2005 2004

OPERATING ACTIVITIES:

Premium receipts $ 1,595 $ 1,108 $ 26 $ 28 $ 1,621 $ 1,136

Interest and dividends received, net 1,344 1,155 64 64 1,408 1,219

Cash received from plans upon trusteeship 218 51 0 0 218 51

Receipts from sponsors/non-sponsors 139 120 0 0 139 120

Receipts from the missing participant program 8 3 0 0 8 3

Other receipts 137 4 0 0 137 4

Benefit payments - trusteed plans (3,301) (2,888) (1) (1) (3,302) (2,889)

Financial assistance payments (14) (10) (14) (10)

Settlements and judgments (5) (7) 0 0 (5) (7)

Payments for administrative and other expenses (324) (278) 0 0 (324) (278)

Net cash provided (used) by operating activities

(Note 13) (189) (732) 75 81 (114) (651)

INVESTING ACTIVITIES:

Proceeds from sales of investments 131,442 44,332 5,114 1,267 136,556 45,599

Payments for purchases of investments

Change in security lending collateral

(136,357)

6,301

(39,497)

417

(5,190)

0

(1,342)

0

(141,547)

6,301

(40,839)

417

Net cash provided (used) by investing activities 1,386 5,252 (76) (75) 1,310 5,177

Net increase (decrease) in cash and cash equivalents 1,197 4,520 (1) 6 1,196 4,526

Cash and cash equivalents, beginning of year 7,692 3,172 14 8 7,706 3,180

Cash and cash equivalents, end of year $ 8,889 $ 7,692 $ 13 $ 14 $ 8,902 $ 7,706

The accompanying notes are an integral part of these financial statements.

22

NOTES TO FINANCIAL STATEMENTSSEPTEMBER 30, 2005 AND 2004

Note 1 -- Organization and Purpose

The Pension Benefit Guaranty Corporation (PBGC or the Corporation) is a federal corporation

created by Title IV of the Employee Retirement Income Security Act of 1974 (ERISA) and is subject to

the provisions of the Government Corporation Control Act. Its activities are defined in ERISA as

amended by the Multiemployer Pension Plan Amendments Act of 1980, the Single-Employer Pension

Plan Amendments Act of 1986, the Pension Protection Act of 1987, the Retirement Protection Act of

1994 and the Consolidated Appropriations Act, 2001. The Corporation insures the pension benefits,

within statutory limits, of participants in covered single-employer and multiemployer defined benefit

pension plans.

ERISA requires that PBGC programs be self-financing. The Corporation’s principal operational

resources are premiums collected from covered plans, assets assumed from terminated plans, collection

of employer liability payments due under ERISA, and investment income. ERISA provides that the

U.S. Government is not liable for any obligation or liability incurred by PBGC.

As of September 30, 2005, the single-employer and multiemployer programs reported deficits of

$22.776 billion and $335 million, respectively. The single-employer program had assets of nearly $56.5

billion which is offset by total liabilities of $79.2 billion, which includes a total present value of future

benefits (PVFB) of approximately $69.7 billion. As of September 30, 2005, multiemployer program had

assets of approximately $1.2 billion offset by approximately $1.5 billion in present value of

nonrecoverable future financial assistance.

Notwithstanding these deficits, the Corporation has sufficient liquidity to meet its obligations for

a number of years; however, neither program at present has the resources to fully satisfy PBGC’s long-

term obligations to plan participants.

Single-Employer and Multiemployer Program Exposure

Measures of risk in PBGC’s insured base of plan sponsors suggest that the single-employer

deficit may continue to worsen. PBGC’s best estimate of the total underfunding in plans sponsored by

companies with credit ratings below investment grade and classified by PBGC as reasonably possible of

termination as of September 30, 2005, was $108 billion. The comparable estimates of reasonably

possible exposure for 2004 and 2003 were $96 billion and $82 billion, respectively. These estimates are

23

measured as of December 31 of the previous year (see Note 7). For 2005, this exposure is concentrated

in the following sectors: manufacturing; transportation, communication and utilities; and services/other.

PBGC estimates that the total underfunding in single-employer plans exceeded $450 billion

(unaudited), as of September 30, 2005, and as of September 30, 2004. PBGC’s estimate of

underfunding as of September 30, 2005, is largely (about 80%) based upon employers’ reports to PBGC

under section 4010 of ERISA of their December 31, 2004, market value of assets and termination

liability. These values were then rolled forward to September 30, 2005, on a plan-by-plan basis using an

average pension asset return from published reports, an average benefit accrual increment, and a liability

adjustment factor to reflect the change in interest factors. The roll forward did not adjust for

contributions, benefit payments, changes in liabilities due to the passage of time, or plan amendments

since this information was not readily or reliably available. PBGC’s exposure to loss is less than these

amounts because of the statutory limits on insured pensions. For single-employer plans sponsored by

employers that do not file with PBGC under section 4010 of ERISA, PBGC’s estimates are based on

data obtained from other filings and submissions with the government and from corporate annual

reports for fiscal years ended in calendar 2004.

Total underfunding of multiemployer plans is estimated to exceed $200 billion (unaudited) at

September 30, 2005. In 2004, PBGC estimated that multiemployer underfunding exceeded $150 billion

(unaudited). Multiemployer plan data is much less current and complete than single-employer data--it is

generally two years older and in some cases three years older than single-employer data and comes only

from Form 5500 filings.

PBGC estimates that, as of September 30, 2005, it is reasonably possible that multiemployer

plans may require future financial assistance in the amount of $418 million. As of September 30, 2004

and 2003, these exposures were estimated at $108 million and $63 million, respectively.

There is significant volatility in plan underfunding and sponsor credit quality over time, which

makes long-term estimates of PBGC’s expected claims difficult. This volatility, and the concentration of

claims in a relatively small number of terminated plans, have characterized PBGC’s experience to date

and will likely continue. Among the factors that will influence PBGC’s claims going forward are

economic conditions affecting interest rates, financial markets, and the rate of business failures.

Under the single-employer program, PBGC is liable for the payment of guaranteed benefits with

respect only to underfunded terminated plans. An underfunded plan may terminate only if PBGC or a

24

bankruptcy court finds that one of the four conditions for a distress termination, as defined in ERISA, is

met or if PBGC involuntarily terminates a plan under one of five specified statutory tests. The net

liability assumed by PBGC is generally equal to the present value of the future benefits payable by

PBGC less amounts provided by the plan’s assets and amounts recoverable by PBGC from the plan

sponsor and members of the plan sponsor’s controlled group, as defined by ERISA.

Under the multiemployer program, if a plan becomes insolvent, it receives financial assistance

from PBGC to allow the plan to continue to pay participants their guaranteed benefits. PBGC

recognizes assistance as a loss to the extent that the plan is not expected to be able to repay these

amounts from future plan contributions, employer withdrawal liability or investment earnings.

Note 2 -- Significant Accounting Policies

Basis of Presentation: The accompanying financial statements have been prepared in

accordance with accounting principles generally accepted in the United States of America (GAAP). The

preparation of the financial statements in conformity with GAAP requires management to make

estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of

contingent assets and liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the reporting period. Estimates and assumptions may change over time

as new information is obtained or subsequent developments occur. Actual results could differ from

those estimates.

Valuation Method: A primary objective of PBGC’s financial statements is to provide

information that is useful in assessing PBGC’s present and future ability to ensure that its plan

beneficiaries receive benefits when due. Accordingly, PBGC values its financial assets at estimated fair

value, consistent with the standards for pension plans contained in Statement of Financial Accounting

Standards (FAS) No. 35 (“Accounting and Reporting by Defined Benefit Pension Plans”). PBGC

values its liabilities for the present value of future benefits and present value of nonrecoverable future

financial assistance using assumptions derived from annuity prices from insurance companies, as

described in the Statement of Actuarial Opinion. As described in Paragraph 21 of FAS No. 35, the

assumptions are “those assumptions that are inherent in the estimated cost at the (valuation) date to

obtain a contract with an insurance company to provide participants with their accumulated plan

benefits.” Also, in accordance with Paragraph 21 of FAS No. 35, PBGC selects assumptions for

25

expected retirement ages and the cost of administrative expenses in accordance with its best estimate of

anticipated experience.

Revolving and Trust Funds: PBGC accounts for its single-employer and multiemployer

programs’ revolving and trust funds on an accrual basis. Each fund is charged its portion of the benefits

paid each year. PBGC has combined the revolving and trust funds for presentation purposes in the

financial statements. The single-employer and multiemployer programs are separate programs by law

and, therefore, PBGC reports them separately.

ERISA provides for the establishment of the revolving fund where premiums are collected and

held. The assets in the revolving fund are used to cover deficits incurred by plans trusteed and provides

funds for financial assistance. The Pension Protection Act of 1987 created a single-employer revolving

(7th) fund that is credited with all premiums in excess of $8.50 per participant, including all penalties and

interest charged on these amounts, and its share of earnings from investments. This fund may not be

used to pay PBGC’s administrative costs or the benefits of any plan terminated prior to October 1,

1988, unless no other amounts are available.

The trust funds include assets PBGC acquires or expects to acquire with respect to terminated

plans (e.g., investments) and investment income thereon. These assets generally are held by custodian

banks. The trust funds support the operational functions of PBGC.

The trust funds reflect accounting activity associated with: (1) trusteed plans -- plans for which

PBGC has legal responsibility–the assets and liabilities are reflected separately on PBGC’s balance sheet,

the income and expenses are included in the income statement and the cash flows from these plans are

included in the cash flow statement, (2) plans pending termination and trusteeship -- plans for which

PBGC has begun the process for termination and trusteeship by fiscal year-end - the assets and liabilities

for these plans are reported as a net amount on the liability side of the balance sheet under Present value

of future benefits, net. For these plans, the income and expenses are included in the income statement,

but the cash flows are not included in the cash flow statement, and (3) probable terminations -- plans

that PBGC determines are likely to terminate and be trusteed by PBGC–the assets and liabilities for

these plans are reported as a net amount on the liability side of the balance sheet under Present value of

future benefits, net. The accrued loss from these plans is included in the income statement as part of

Losses from completed and probable terminations. The cash flows from these plans are not included in

the cash flow statement. PBGC cannot exercise legal control over a plan’s assets until it becomes

trustee.

26

Allocation of Revolving and Trust Funds: PBGC allocates assets, liabilities, income and

expenses to each program’s revolving and trust funds to the extent that such amounts are not directly

attributable to a specific fund. Revolving fund investment income is allocated on the basis of each

program’s average cash and investments available during the year while the expenses are allocated on the

basis of each program’s present value of future benefits. Revolving fund assets and liabilities are

allocated on the basis of the year-end equity of each program’s revolving funds. Plan assets acquired by

PBGC and commingled at PBGC’s custodian bank are credited directly to the appropriate fund while

the earnings and expenses on the commingled assets are allocated to each program’s trust funds on the

basis of each trust fund’s value, relative to the total value of the commingled fund.

Cash and Cash Equivalents: Cash includes cash on hand and demand deposits as well as cash

collateral retained as security for securities lent. Cash equivalents are securities with a maturity of one

business day.

Investment Valuation and Income: PBGC bases market values on the last sale of a listed

security, on the mean of the “bid-and-ask” for nonlisted securities or on a valuation model in the case of

fixed-income securities that are not actively traded. These valuations are determined as of the end of

each fiscal year. Purchases and sales of securities are recorded on the trade date. In addition, PBGC

invests in and discloses its derivative investments in accordance with the guidance contained in FAS No.

133 (“Accounting for Derivative Instruments and Hedging Activities”), as amended. Investment

income is accrued as earned. Dividend income is recorded on the ex-dividend date. Realized gains and

losses on sales of investments are calculated using first-in, first-out for the revolving fund and average

cost for the trust fund. PBGC marks the plan’s assets to market and any increase or decrease in the

market value of a plan’s assets occurring after the date on which the plan is terminated must, by law, be

credited to or suffered by PBGC.

Sponsors of Terminated Plans, Receivables: The amounts due from sponsors of terminated

plans or members of their controlled group represent the settled, but uncollected, claims for employer

liability (underfunding as of date of plan termination) and for contributions due their plan less an

allowance for estimated uncollectible amounts. PBGC discounts any amounts expected to be received

beyond one year for time and risk factors. Some agreements between PBGC and plan sponsors provide

for contingent payments based on future profits of the sponsors. The Corporation will report any such

future amounts in the period they are realizable. Income and expenses related to amounts due from

27

sponsors are reported in the underwriting section of the Statements of Operations and Changes in Net

Position. Interest earned on settled claims for employer liability and due and unpaid employer

contributions (DUEC) is reported as “Income: Other.” The change in the allowances for uncollectible

employer liability and DUEC is reported as “Expenses: Other.”

Premiums: Premiums receivable represent the estimated earned but unpaid portion of the

premiums for plans that have a plan year commencing before the end of PBGC’s fiscal year and past

due premiums deemed collectible, including penalties and interest. The liability for unearned premiums

represents an estimate of payments received during the fiscal year that cover the portion of a plan’s year

after PBGC’s fiscal year-end. Premium income represents actual and estimated revenue generated from

self-assessments from defined benefit pension plans as required by Title IV of ERISA (see Note 9).

Capitalized Assets: Capitalized assets include furniture and fixtures, EDP equipment and

internal-use software. Beginning in fiscal year 2004, PBGC, in compliance with AICPA Statement Of

Position 98-1 and FASB EITF 97-13 began to account for the cost of computer software developed for

internal use. This includes costs for internally developed software incurred during the application

development stage (system design including software configuration and software interface, coding,

testing including parallel processing phase). These costs are shown net of depreciation and

amortization.

Present Value of Future Benefits (PVFB): The PVFB is the estimated liability for future

pension benefits that PBGC is or will be obligated to pay the participants of trusteed plans and the net

liability for plans pending termination and trusteeship. The PVFB liability (including trusteed plans as

well as plans pending termination and trusteeship) is stated as the actuarial present value of estimated

future benefits less the present value of estimated recoveries from sponsors and members of their

controlled group and the assets of plans pending termination and trusteeship as of the date of the

financial statements. PBGC also includes the estimated liabilities attributable to plans classified as

probable terminations as a separate line item in the PVFB (net of estimated recoveries and plan assets).

PBGC uses assumptions to adjust the value of those future payments to reflect the time value of money

(by discounting) and the probability of payment (by means of decrements, such as for death or

retirement). PBGC also includes anticipated expenses to settle the benefit obligation in the

determination of the PVFB. PBGC’s benefit payments to participants reduces the PVFB liability.

28

The values of the PVFB are particularly sensitive to changes in underlying estimates and

assumptions. These estimates and assumptions could change and the impact of these changes may be

material to PBGC’s financial statements (see Note 4).

(1) Trusteed Plans--represents the present value of future benefit payments less the present

value of expected recoveries (for which a settlement agreement has not been reached with

sponsors and members of their controlled group) for plans that have terminated and been

trusteed by PBGC prior to fiscal year-end. Assets are shown separately from liabilities for

trusteed plans.

(2) Pending Termination and Trusteeship--represents the present value of future benefit

payments less the plans’ net assets (at fair value) anticipated to be received and the present

value of expected recoveries (for which a settlement agreement has not been reached with

sponsors and members of their controlled group) for plans for which termination action

has been initiated and/or completed prior to fiscal year-end. Unlike trusteed plans, the

liability for plans pending termination and trusteeship is shown net of plan assets.

(3) Settlements and Judgments--represents estimated liabilities related to settled litigation.

(4) Net Claims for Probable Terminations-- In accordance with Statement of Financial

Accounting Standards No. 5 (Accounting for Contingencies) PBGC recognizes net claims

for probable terminations which represent PBGC’s best estimate of the losses, net of plan

assets and the present value of expected recoveries (from sponsors and member

controlled group) for plans that are likely to terminate within twelve months of the

financial statement issuance date. These estimated losses are based on conditions that

existed as of PBGC’s fiscal year-end. Management believes it is likely that one or more

events subsequent to PBGC’s fiscal year-end will occur, confirming the loss. Criteria used

for classifying a specific plan as a probable termination include, but are not limited to, one

or more of the following conditions: the plan sponsor is in liquidation or comparable

state insolvency proceeding with no known solvent controlled group member; sponsor

has filed or intends to file for distress plan termination; or PBGC seeks involuntary plan

termination. In addition, management takes into account other economic events and

factors in making judgments regarding the classification of a plan as a probable

termination. These events and factors may include, but are not limited to: the plan

29

sponsor is in bankruptcy or has indicated that a bankruptcy filing is imminent; the plan

sponsor has stated that plan termination is likely; the plan sponsor has received a going

concern opinion from its independent auditors; or the plan sponsor is in default under

existing credit agreement(s).

In addition, a reserve for large unidentified probable losses is recorded based on actual

PBGC experience, as well as the historical industry bond default rates. This reserve has

been developed by segregating plan sponsors listed on the contingency list, with plan

funding ratios less than or equal to 80%, with aggregate underfunding equal to or greater

than $50 million into risk bands which reflect their level of credit risk. A reserve for small

unidentified probable losses and incurred but not reported (IBNR) claims is also recorded

based on an actuarial loss development methodology (triangulation method) (see Note 4).

(5) PBGC identifies certain plans as high risk if the plan sponsor meets one or more criteria

that include, but are not limited to, the following conditions: sponsor is in Chapter 11

proceedings; sponsor received a minimum funding waiver within the past five years;

sponsor granted security to an unsecured creditor as part of a renegotiation of debt within

the past two years; sponsor is known to have been in default on existing debt within the

past two years (regardless of whether it received a waiver of default); or sponsor’s

unsecured debt is rated CCC+/Caa1 or lower by S&P or Moody’s respectively. PBGC

specifically reviews each plan identified as high risk and classifies those plans as probable

if, based on available evidence, PBGC concludes that plan termination is likely.

Otherwise, high risk plans are classified as reasonably possible.

(6) In accordance with Statement of Financial Accounting Standards No. 5 (Accounting for

Contingencies), PBGC’s exposure to losses from plans of companies that are classified as

reasonably possible is disclosed in footnotes. In order for a plan sponsor to be

specifically classified as reasonably possible, it must first have $5 million or more of

underfunding, as well as meet additional criteria. Criteria used for classifying a company

as reasonably possible include, but are not limited to, one or more of the following

conditions: the plan sponsor is in Chapter 11 reorganization; funding waiver pending or

outstanding with the Internal Revenue Service (IRS); sponsor missed minimum funding

contribution; sponsor’s bond rating is below-investment-grade for Standard & Poor’s

30

(BB+) or Moody’s (Ba1); sponsor has no bond rating but unsecured debt is below

investment grade; or sponsor has no bond rating but the ratio of long-term debt plus

unfunded benefit liability to market value of shares is 1.5 or greater (see Note 7).

Present Value of Nonrecoverable Future Financial Assistance: In accordance with Title

IV of ERISA, PBGC provides financial assistance to multiemployer plans, in the form of loans, to

enable the plans to pay guaranteed benefits to participants and reasonable administrative expenses.

These loans, issued in exchange for interest-bearing promissory notes, constitute an obligation of each

plan.

The present value of nonrecoverable future financial assistance represents the estimated

nonrecoverable payments to be provided by PBGC in the future to multiemployer plans that will not

be able to meet their benefit obligations. The present value of nonrecoverable future financial

assistance is based on the difference between the present value of future guaranteed benefits and

expenses and the market value of plan assets, including the present value of future amounts expected to

be paid by employers, for those plans that are expected to require future assistance. The amount

reflects the rates at which, in the opinion of management, these liabilities (net of expenses) could be

settled in the market for single-premium nonparticipating group annuities issued by private insurers

(see Note 5).

A liability for a particular plan is included in the Present Value of Nonrecoverable Future

Financial Assistance when it is determined that the plan is currently, or will likely become in the future,

insolvent and will require assistance to pay the participants their guaranteed benefit. Determining

insolvency requires considering several complex factors, such as an estimate of future cash flows, future

mortality rates, and age of participants not in pay status.

Other Expenses: These expenses represent an estimate of the net amount of receivables

deemed to be uncollectible during the period. The estimate is based on the most recent status of the

debtor (e.g., sponsor), the age of the receivables and other factors that indicate the element of

uncollectibility in the receivables outstanding.

Losses from Completed and Probable Terminations: Amounts reported as losses from

completed and probable terminations represent the difference as of the actual or expected date of plan

termination (DOPT) between the present value of future benefits (including amounts owed under

Section 4022(c) of ERISA) assumed, or expected to be assumed, by PBGC, less related plan assets and

31

the present value of expected recoveries from sponsors and members of their controlled group (see

Note 10). When a plan terminates, the previously recorded probable Net claim is reversed and newly

estimated DOPT plan assets, recoveries and PVFB are netted and reported on the line PVFB - Plans

pending termination and trusteeship (this value is usually different than the amount previously

reported), with any change in the estimate being recorded in the Statements of Operations and Changes

in Position. In addition, the plan’s net income from date of plan termination to the beginning of

PBGC’s fiscal year is included as a component of losses from completed and probable terminations for

plans with termination dates prior to the year in which they were added to PBGC’s inventory of

terminated plans.

Actuarial Adjustments and Charges (Credits): PBGC classifies actuarial adjustments related

to changes in method and the effect of experience as underwriting activity; actuarial adjustments are the

result of the movement of plans from one valuation methodology to another (e.g., nonseriatim to

seriatim) and of new data (e.g., deaths, revised participant data). Actuarial charges (credits) related to

changes in interest rates and passage of time are classified as financial activity. These adjustments and

charges (credits) represent the change in the PVFB that results from applying actuarial assumptions in

the calculation of future benefit liabilities (see Note 4).

Depreciation and Amortization: PBGC calculates depreciation on the straight-line basis over

estimated useful lives of 5 years for equipment and 10 years for furniture and fixtures. PBGC

calculates amortization for capitalized software, which includes certain costs incurred for purchasing

and developing software for internal use, on the straight-line basis over estimated useful lives not to

exceed 5 years, commencing on the date that the Corporation determines that the internal-use software

is implemented. Routine maintenance and leasehold improvements (the amounts of which are not

material) are charged to operations as incurred.

Reclassification: Certain amounts in the 2004 financial statements have been reclassified

to be consistent with the 2005 presentation.

Note 3 -- Investments

Premium receipts are invested in U.S. Treasury securities.

The trust funds include assets PBGC acquires or expects to acquire with respect to terminated plans

(e.g., recoveries from sponsors) and investment income thereon. These assets generally are held by

32

custodian banks. The basis and market value of the investments by type are detailed below as well as

related investment profile data. The basis indicated is cost of the asset if acquired after the date of plan

termination or the market value at date of plan termination if the asset was acquired as a result of a

plan’s termination. PBGC marks the plan’s assets to market and any increase or decrease in the market

value of a plan’s assets occurring after the date on which the plan is terminated must, by law, be

credited to or suffered by PBGC. As the table below illustrates, the market value of investments of the

single-employer program increased significantly from September 30, 2004, to September 30, 2005. This

was primarily due to (1) a large amount of cash available at September 30, 2004, which was deployed to

the new fixed income managers early in FY 2005 and (2) significant inflow of assets from trusteed plans

in 2005. This resulted in a significant increase in income from fixed income securities. Note 11

provides the components of investment income.

INVESTMENTS OF SINGLE-EMPLOYER REVOLVING FUNDS AND SINGLE-EMPLOYER TRUSTEED PLANS

September 30, September 30, 2005 2004

(Dollars in millions)Market

Basis Value Market

Basis Value

Fixed maturity securities:

U.S. Government securities $21,562 $21,417 $15,095 $15,667

Commercial paper 336 336 188 188

Asset backed securities 3,286 3,265 399 396

Corporate and other bonds 8,194 8,142 1,050 1,082

Subtotal 33,378 33,160 16,732 17,333

Equity securities 8,565 12,284 7,536 11,115

Real estate and real estate investment trusts 33 29 83 91

Insurance contracts and other investments 32 25 38 23

Total * $42,008 $45,498 $24,389 $28,562

* This includes securities on loan at September 30, 2005, and September 30, 2004, with a market value of $6.769 billion and $622 million, respectively.

INVESTMENTS OF MULTIEMPLOYER REVOLVING FUNDS AND MULTIEMPLOYER TRUSTEED PLANS

September 30, September 30,

2005 2004

(Dollars in millions)Market

Basis Value Market

Basis Value

Fixed maturity securities:

U.S. Government securities $1,151 $1,134 $1,006 $1,042

Equity securities 0 0 0 1

Total $1,151 $1,134 $1,006 $1,043

33

INVESTMENT PROFILE

September 30, 2005 2004Fixed-Income AssetsAverage Quality AAA AAA Average Maturity (years) 16.6 15.2 Duration (years) 10.4 9.1 Yield to Maturity (%) 4.8 4.4

Equity AssetsAverage Price/Earnings Ratio 20.2 20.4Dividend Yield (%) 1.6 1.7 Beta 1.03 0.98

In addition, PBGC’s trusteed liability return was 2.6% and the duration (years) of these liabilities was

9.93 in 2005.

Derivative Instruments: Derivatives are accounted for at market value in accordance with

Statement of Financial Accounting Standards No. 133, as amended. Derivatives are marked to market

with changes in value reported within financial income. These instruments are used to mitigate risk

and/or enhance PBGC’s investment returns. The standard requires disclosure of fair value of these

instruments. During fiscal years 2004 and 2005, PBGC invested in investment products, which used

various U.S. and non-U.S. derivative instruments including but not limited to: equity index futures

contracts, money market and government bond futures contracts, swap contracts, swaption contracts,

stock warrants and rights, debt option contracts and foreign currency forward and option contracts.

Some of these derivatives are traded on organized exchanges and thus bear minimal credit risk. The

counterparties to PBGC’s non-exchange-traded derivative contracts are major financial institutions.

PBGC has never experienced non-performance by any of its counterparties.

Futures are exchange-traded contracts specifying a future date of delivery or receipt of a certain

amount of a specific tangible or intangible product. The futures exchange’s clearinghouses clear, settle,

and guarantee transactions occurring through its facilities. Institutional investors hold these future

contracts on behalf of PBGC as efficient and liquid substitutes for purchases and sales of financial

market indices and securities. Open futures positions are marked to market daily. An initial margin of

generally 1 to 6 percent is maintained with the broker in Treasury bills or similar instruments. In

addition, futures contracts require daily settlement of variation margin resulting from the marks to

market. In periods of extreme volatility, margin calls may create a high liquidity demand on the

34

underlying portfolio. To mitigate this, PBGC maintains adequate liquidity in its portfolio to meet these

margin calls.

A swap is an agreement between two parties to exchange different financial returns on a notional

investment amount. For example, an interest rate swap involves exchanges of fixed rate and floating

rate interest. There is no exchange of the underlying principal. During fiscal years 2004 and 2005, gains

and losses from settled margin calls (e.g., from futures, swaps, and options) are reported in Investment

income on the Statement of Operations and Changes in Net Position.

PBGC’s investment managers employ a variety of derivative investment strategies including:

investment of foreign currency forward and option contracts used to adjust overall currency exposure to

reflect the investment views of the portfolio managers regarding relationships between currencies;

investment in swap and swaption contracts to adjust exposure to interest rates, fixed income securities

exposure, and to generate income based on the investment views of the portfolio managers regarding

interest rates, indices and debt issues; and investment in stock warrants and rights that allow the

purchase of securities at a stipulated price within a specified time limit. Derivative instruments are not

used to create leverage in PBGC’s investment portfolio.

The following table summarizes the notional amounts and fair market values of derivative

financial instruments held or issued for trading as of September 30, 2005, and September 30, 2004.

35

9/30/05 9/30/04INTEREST RATE CONTRACTS (IRC) Notional FMV Notional FMV (Dollars in millions)

Forwards $ 149 $ 0 $ 20 $ 0

Futures 5,098 6 2,254 15 Contracts in a receivable position 1,645 15 1,807 16 Contracts in a payable position 3,453 (9) 447 (1)

Swap Agreements 4,385 38 223 5

Options purchased (long) 2 0 0 0

Options written (sold short) 80 0 135 (1)

9/30/05 9/30/04FOREIGN EXCHANGE CONTRACTS (FEC) Notional FMV Notional FMV

Forwards $1,129 $ (3) $ 322 $ 2

Options purchased (long) 0 0 1 0

Security Lending: PBGC participates in a security lending program administered by its

custodian bank. The custodian bank requires collateral that equals 102 percent to 105 percent of the

securities lent. The collateral is held by the custodian bank. In addition to the lending program

managed by the custodian bank, some of PBGC’s investment managers are authorized to invest in

repurchase agreements and reverse repurchase agreements. The manager either receives cash as

collateral or pays cash out to be used as collateral. Any cash collateral received is invested. The total

value of securities on loan at September 30, 2005, and September 30, 2004, was $6.769 billion and

$622 million, respectively. Securities on loan have increased significantly since September 30, 2004, due

to an ongoing demand for fixed-income securities to lend and the new capacity to lend such securities

provided by approximately $12.833 billion of new fixed-income securities as of September 30, 2005.

The amount of cash collateral received for these loaned securities was $6.939 billion at

September 30, 2005, and $637 million at September 30, 2004. These amounts are recorded in cash and

are offset with a corresponding liability. PBGC had earned income from securities lending of $4.0

million as of September 30, 2005 and $1.1 million as of September 30, 2004.

36

Of the $6.769 billion market value of securities on loan at September 30, 2005, approximately

92% are invested in U.S. government securities and 8% in U.S. corporate securities. PBGC had

available approximately $15.960 billion of securities available for securities lending at September 30,

2005.

Note 4 -- Present Value of Future Benefits

The following table summarizes the actuarial adjustments, charges and credits that explain how

the Corporation’s single-employer program liability for the present value of future benefits changed for

the years ended September 30, 2005 and 2004.

For FY 2005, PBGC used a 25-year select interest factor of 5.2% followed by an ultimate factor

of 4.5% for the remaining years. In FY 2004, PBGC used a 25-year select interest factor of 4.8%

followed by an ultimate factor of 5.0% for the remaining years. These factors were determined to be

those needed, given the mortality assumptions, to continue to match the survey of annuity prices

provided by the American Council of Life Insurers (ACLI). Both the interest factor and the length of the

select period may vary to produce the best fit with these prices. The prices reflect rates at which, in the

opinion of management, the liabilities (net of administrative expenses) could be settled in the market at

September 30, for the respective year, for single-premium nonparticipating group annuities issued by

private insurers. Many factors, including Federal Reserve policy, may impact these rates.

For September 30, 2005, PBGC used the 1994 Group Annuity Mortality (GAM) 94 Static Table

(with margins), set forward one year and projected 22 years to 2016 using Scale AA. For September 30,

2004, PBGC used the same table, set forward one year, projected 20 years to 2014 using Scale AA. The

number of years that PBGC projects the mortality table reflects the number of years from the 1994 base

year of the table to the end of the fiscal year (11 years in 2005 versus 10 years in 2004) plus PBGC’s

calculated duration of its liabilities (11 years in 2005 versus 10 years in 2004). PBGC’s procedure is

based on the procedures recommended by the Society of Actuaries UP-94 Task Force (which developed

the GAM94 table) for taking into account future mortality improvements.

PBGC continues to utilize the results of its 2004 mortality study. The study showed that the

mortality assumptions used in FY 2003 reflected higher mortality than was realized in PBGC’s seriatim

population. Therefore, PBGC adopted a base mortality table (i.e., GAM94 set forward one year instead

of GAM94 set forward two years) that better reflects past mortality experience. The ACLI survey of

37

annuity prices, when combined with the mortality table, provides the basis for determining the interest

factors used in calculating the PVFB. The insurance annuity prices, when combined with the stronger

mortality table, result in a higher interest factor. The 2004 increase in the liability due to the change in

the mortality table is included in the actuarial adjustments. There was a compensating decrease in the

actuarial charge due to the change in interest rates.

The reserve for administrative expenses in the 2005 and 2004 valuations were assumed to be

1.18 percent of benefit liabilities plus additional reserves for cases whose plan asset determinations,

participant database audits and actuarial valuations were not yet complete. The expense assumption was

based on a study performed for PBGC in 2000 by a major accounting firm. The factors to determine

the additional reserves were based on case size, number of participants and time since trusteeship.

The present values of future benefits for trusteed multiemployer plans for 2005 and 2004 reflect

the payment of assistance and the changes in interest and mortality assumptions, passage of time and the

effect of experience.

The resulting liability represents PBGC’s best estimate of the measure of anticipated experience

under these programs.

38

RECONCILIATION OF THE PRESENT VALUE OF FUTURE BENEFITS FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004 September 30,

(Dollars in millions) 2005 2004Present value of future benefits, at beginning of year -- Single-Employer, net $ 60,836

$44,641

Estimated recoveries, prior year 364 68 Assets of terminated plans pending trusteeship, net, prior year 678 172 Present value of future benefits at beginning of year, gross 61,878 44,881 Settlements and judgments, prior year (65) (67) Net claims for probable terminations, prior year (16,926) (5,207) Actuarial adjustments -- underwriting:

Changes in method and assumptions $ 17 $ 1,340 Effect of experience 203 185 Total actuarial adjustments -- underwriting 220 1,525

Actuarial charges -- financial: Passage of time 2,618 1,881 Change in interest rates (2,348) (1,619) Total actuarial charges -- financial 270 262

Total actuarial charges, current year 490 1,787 Terminations: Current year 21,191 6,926 Changes in prior year (292) (427) Total terminations 20,899 6,499 Benefit payments, current year* (3,685) (3,006) Estimated recoveries, current year (343) (364) Assets of terminated plans pending trusteeship, net, current year (3,039) (678) Settlements and judgments, current year 58 65 Net claims for probable terminations: Future benefits** 23,918 30,953 Estimated plan assets and recoveries from sponsors (13,448) (14,027) Total net claims, current year 10,470 16,926 Present value of future benefits, at end of year -- Single-Employer, net 69,737 60,836 Present value of future benefits, at end of year -- Multiemployer 2 3 Total present value of future benefits, at end of year, net $ 69,739 $60,839

* The benefit payments of $3,685 million and $3,006 million include $384 million in 2005 and $119 million in 2004 for benefits paid from plan assets by plans priorto trusteeship.

** The future benefits for probable terminations of $23,918 million and $30,953 million for fiscal years 2005 and 2004, respectively, include $137 million and $431 million, respectively, in net claims (future benefits less estimated plan assets and recoveries) for probable terminations not specifically identified and $23,781million and $30,522 million, respec tively, in ne t claims for specifically identified p robab les.

The following table details the assets that make up single-employer terminated plans pending terminationand trusteeship:

ASSETS OF SINGLE-EMPLOYER PLANS PENDING TERMINATION AND TRUSTEESHIP, NET

September 30, September 30, 2005 2004

(Dollars in millions)Market

Basis Value Market

Basis Value

U.S. Government securities $ 0 $ 0 $ 3 $ 3

Corporate and other bonds 1,043 1,053 265 281

Equity securities 1,968 1,992 364 382

Insurance contracts 2 2 2 2

Other (7) (8) 10 10

Total $3,006 $3,039 $644 $678

Net Claims for Probable Terminations: Factors that are presently not fully determinable may

be responsible for these claim estimates differing from actual experience. Included in net claims for

probable terminations is a provision for future benefit liabilities for plans not specifically identified.

The values recorded in the following reconciliation table have been adjusted to the expected dates

of termination.

39

RECONCILIATION OF NET CLAIMS FOR PROBABLE TERMINATIONS

September 30, (Dollars in millions) 2005 2004

Net claims for probable terminations, at beginning of year $16,926 $ 5,207

Change in IBNR (41)

New claims $ 4,738 $14,407

Actual terminations (10,637) (3,258)

Deleted probables (83) (243)

Change in benefit liabilities (205) 929

Change in plan assets (269) (75)

Loss (credit) on probables (6,456) 11,760

Net claims for probable terminations, at end of year $10,470 $16,926

The following table itemizes the probable exposure by industry:

PROBABLES EXPOSURE BY INDUSTRY (PRINCIPAL CATEGORIES)

(Dollars in millions) FY 2005 FY 2004

Transportation, Communication and Utilities $ 9,570 $15,057

Manufacturing 612 630

Agriculture, Mining, and Construction 37 -

Wholesale and Retail Trade 18 219

Finance, Insurance, and Real Estate - 569

Services/Other 233 451

Total $10,470 $16,926

For further detail, see Note 2 subpoint (4)

The following table shows what has happened to plans classified as

probables. This table does not capture or include those plans that were not

previously classified as probable before they terminated.

PROBABLES EXPERIENCE As Initially Recorded Beginning in 1987

(Dollars in millions) Status of Probables from 1987-2004 at September 30, 2005

Beginning in 1987, number of plans reported as Probable: Number of

Plans Percent of

Plans Net

Claim Percent of

Net Claim

Probables terminated 271 79% $21,788 76%

Probables not yet terminated or deleted 6 2 5,774 20

Probables deleted 67 19 1,105 4

Total 344 100% $28,667 100%

40

Note 5 -- Multiemployer Financial Assistance

PBGC provides financial assistance to multiemployer defined benefit pension plans in the

form of loans. An allowance is set up to the extent that repayment of these loans is not expected.

NOTES RECEIVABLE MULTIEMPLOYER FINANCIAL ASSISTANCE

September 30,

(Dollars in millions) 2005 2004

Gross balance at beginning of year $ 71 $ 61

Financial assistance payments-current year 14 10

Subtotal 85 71

Allowance for uncollectible amounts (85) (71)

Net balance at end of year $ 0 $ 0

The losses from financial assistance reflected in the Statements of Operations and Changes

in Net Position include period changes in the estimated present value of nonrecoverable future

financial assistance.

PRESENT VALUE OF NONRECOVERABLE FUTURE FINANCIAL ASSISTANCE AND LOSSES FROM FINANCIAL ASSISTANCE

________________________________________________________________________

September 30,

(Dollars in millions) 2005 2004

Balance at beginning of year $1,295 $1,250

Changes in allowance: Losses from financial assistance 204 55

Financial assistance granted (previously accrued) (14) (10)

Balance at end of year $1,485 $1,295

Note 6 -- Accounts Payable and Accrued Expenses

The following table itemizes accounts payable and accrued expenses reported in the

Statements of Financial Condition:

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

September 30,

(Dollars in millions) 2005 2004

Annual leave $ 5 $ 5

Other payables and accrued expenses 65 66

Accounts payable and accrued expenses $70 $71

41

Note 7 -- Contingencies

Single-employer plans sponsored by companies whose credit quality is below investment

grade pose a greater risk of being terminated. In addition, there are some multiemployer plans that

may require future financial assistance. The amounts disclosed below represent the Corporation’s

best estimates of the possible losses in these plans given the inherent uncertainties about these plans.

In accordance with Statement of Financial Accounting Standards No. 5, PBGC classified a

number of these companies as reasonably possible terminations as the sponsors’ financial condition

and other factors did not indicate that termination of their plans was likely as of year-end. The best

estimate of aggregate unfunded vested benefits exposure to PBGC for the companies’ single-

employer plans classified as reasonably possible as of September 30, 2005, was $108 billion.

The estimated unfunded vested benefits exposure has been calculated as of December 31,

2004. PBGC calculated this estimate as in previous years by using data obtained from filings and

submissions with the government and from corporate annual reports for fiscal years ending in

calendar 2004. The Corporation adjusted the value reported for liabilities to the December 31, 2004,

PBGC select interest rate of 3.9%. When available, data were adjusted to a consistent set of

mortality assumptions. The underfunding associated with these sponsors’ plans would generally

tend to be greater at September 30, 2005, because of the economic conditions that existed between

December 31, 2004, and September 30, 2005. The Corporation did not adjust the estimate for

events that occurred between December 31, 2004, and September 30, 2005.

42

The following table itemizes the reasonably possible exposure by industry:

REASONABLY POSSIBLE EXPOSURE BY INDUSTRY (PRINCIPAL CATEGORIES)

(Dollars in millions) FY 2005 FY 2004

Manufacturing $ 71,332 $51,325

Transportation, Communication and Utilities 17,567 26,985

Services/Other 8,623 8,725

Wholesale and Retail Trade 7,296 5,674

Agriculture, Mining and Construction 1,731 1,866

Finance, Insurance, and Real Estate 1,490 1,098

Total $108,039 $95,673

FY 2004 amounts were reclassified to conform to the NAIC classification codes

PBGC included amounts in the liability for the present value of nonrecoverable future financial

assistance (see Note 5) for multiemployer plans that PBGC estimated may require future financial

assistance. In addition, PBGC currently estimates that it is reasonably possible that other

multiemployer plans may require future financial assistance in the amount of $418 million.

The Corporation calculated the future financial assistance liability for each multiemployer plan

identified as probable (see Note 5), or reasonably possible as the present value of guaranteed future

benefit and expense payments net of any future contributions or withdrawal liability payments as of

the later of September 30, 2005, or the projected (or actual, if known) date of plan insolvency,

discounted back to September 30, 2005. The Corporation’s identification of plans that are likely to

require such assistance and estimation of related amounts required consideration of many complex

factors, such as an estimate of future cash flows, future mortality rates, and age of participants not in

pay status. These factors are affected by future events, including actions by plans and their

sponsors, most of which are beyond the Corporation’s control.

PBGC used select and ultimate interest rate assumptions of 5.2% for the first 25 years after the

valuation date and 4.5% thereafter. The Corporation also used the 1994 Group Annuity Mortality

Static Table (with margins), set forward one year, projected 22 years to 2016 using Scale AA.

Note 8 -- Commitments

PBGC leases its office facility under a new commitment that began on January 1, 2005, and expires

December 10, 2018. The new lease agreement was entered into because of the need for additional office

space. This lease provides for periodic rate increases based on increases in operating costs and real

estate taxes over a base amount. In addition, PBGC is leasing space for field benefit administrators.

43

These leases began in 1996 and expire in 2013. The minimum future lease payments for office facilities

having noncancellable terms in excess of one year as of September 30, 2005, are as follows:

COMMITMENTS: FUTURE LEASE PAYMENTS (Dollars in millions)

Years EndingSeptember 30,

OperatingLeases

2006 $ 18.7

2007 18.7

2008 18.0

2009 17.5

2010 17.3

Thereafter 118.6

Minimum lease payments $208.8

Lease expenses were $18.0 million in 2005 and $15.6 million in 2004.

Note 9 -- Premiums

For both the single-employer and multiemployer programs, ERISA provides that PBGC shall

continue to guarantee basic benefits despite the failure of a plan administrator to pay premiums when

due. PBGC assesses interest and penalties on the unpaid portion of or underpayment of premiums.

Interest continues to accrue until the premium and the interest due are paid. The amount of penalty that

can be levied is capped at 100 percent of the premium late payment or underpayment. Annual flat-rate

premiums for the single-employer program are $19 per participant. Underfunded single-employer plans

also pay variable-rate premiums of $9 per $1,000 of underfunding if not exempt from the variable-rate

premiums. Annual flat-rate premiums for the multiemployer program are $2.60 per participant and there

are no variable-rate premiums. PBGC recorded premium income, excluding interest and penalty, of

approximately $670 million in flat-rate premiums and $787 million in variable-rate premiums for fiscal

year 2005, and approximately $677 million in flat-rate premiums and $804 million in variable-rate

premiums for fiscal year 2004.

44

Note 10 -- Losses from Completed and Probable Terminations

Amounts reported as losses are the present value of future benefits less related plan assets and the

present value of expected recoveries from sponsors. The following table details the components that

make up the losses:

LOSSES FROM COMPLETED AND PROBABLE TERMINATIONS -- SINGLE-EMPLOYER PROGRAM

For the Years Ended September 30,

2005 2004

(Dollars in millions)

New Terminations

Changes in Prior Year

Terminations Total New

Terminations

Changes in Prior Year

Terminations Total

Present value of future benefits $21,191 $(292) $20,899 $6,926 $(427) $ 6,499

Less plan assets 10,516 0 10,516 3,137 125 3,262

Plan asset insufficiency 10,675 (292) 10,383 3,789 (552) 3,237

Less estimated recoveries 9 (37) (28) 280 11 291

Subtotal $10,666 $(255) 10,411 $3,509 $(563) 2,946

Settlements and judgments (1) 1

Loss (credit) on probables (6,456)* 11,760 *

Total $ 3,954 $14,707 * See Note 4

Note 11 -- Financial Income

The following table details the combined financial income by type of investment for both the single-

employer and multiemployer programs:

Investment Income - Single-Employer and Multiemployer Programs

Single-Employer Multiemployer Memorandum Single-Employer Multiemployer Memorandum Program Program Total Program Program Total

(Dollars in millions) Sept 30, 2005 Sept 30, 2005 Sept 30, 2005 Sept 30, 2004 Sept 30, 2004 Sept 30, 2004

Fixed-income securities:

Interest earned $1,270 $ 53 $1,323 $ 858 $50 $ 908

Realized gain (loss) 1,361 82 1,443 (18) (2) (20)

Unrealized gain (loss) (876) (56) (932) 143 6 149

Total fixed-income securities 1,755 79 1,834 983 54 1,037

Equity securities:

Dividends earned 81 0 81 104 0 104

Realized gain 1,540 0 1,540 1,044 0 1,044

Unrealized gain 493 0 493 1,048 0 1,048

Total equity securities 2,114 0 2,114 2,196 0 2,196

Other income 28 0 28 18 0 18

Total investment income $3,897 $ 79 $3,976 $3,197 $54 $3,251

45

Note 12 -- Employee Benefit Plans

All permanent full-time and part-time PBGC employees are covered by the Civil Service

Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Full-time and part-

time employees with less than five years service under CSRS and hired after December 31, 1983, are

automatically covered by both Social Security and FERS. Employees hired before January 1, 1984,

participate in CSRS unless they elected and qualified to transfer to FERS.

The Corporation’s contribution to the CSRS plan for both 2005 and 2004 was 7.0

percent of base pay for those employees covered by that system. For those employees covered by

FERS, the Corporation’s contribution was 10.7 percent of base pay for both 2005 and 2004. In

addition, for FERS-covered employees, PBGC automatically contributes 1 percent of base pay to the

employee’s Thrift Savings account, matches the first 3 percent contributed by the employee and matches

one-half of the next 2 percent contributed by the employee. Total retirement plan expenses amounted

to $11 million in 2005 and $10 million in 2004.

These financial statements do not reflect CSRS or FERS assets or accumulated plan

benefits applicable to PBGC employees. These amounts are reported by the U.S. Office of Personnel

Management (OPM) and are not allocated to the individual employers. OPM accounts for federal

health and life insurance programs for those eligible retired PBGC employees who had selected federal

government-sponsored plans. PBGC does not offer other supplemental health and life insurance

benefits to its employees.

Note 13 -- Cash Flows

The following two tables, one for Sales and one for Purchases, provide further details on cash

flows from investment activity. Sales and purchases of investments are driven by the level of newly

trusteed plans, the unique investment strategies implemented by PBGC’s investment managers, and the

varying capital market conditions in which they invest during the year. Several investment strategies in

use in 2005 involved higher volume short term investments, particularly in the fixed income area, as

shown in the Investing Activities table below. These cash flow numbers can vary significantly from year

to year based on the fluctuation in these three variables.

46

INVESTING ACTIVITIES

September 30,

(Dollars in millions) 2005 2004

Proceeds from sales of investments:

Fixed maturity securities $125,646 $37,929

Equity securities 8,515 4,677

Other/uncategorized 2,395 2,993

Total $136,556 $45,599

Payments for purchases of investments:

Fixed maturity securities $(139,681) $(38,872)

Equity securities (7,022) (2,013)

Other/uncategorized 5,156 46

Total $(141,547) $(40,839)

47

The following is a reconciliation between the net income as reported in the Statements of Operations

and Changes in Net Position and net cash provided by operating activities as reported in the Statements

of Cash Flows.

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Single-Employer

Program

Multiemployer

Program

Memorandum

Total

September 30, September 30, September 30,

(Dollars in millions) 2005 2004 2005 2004 2005 2004

Net income (loss) $ 529 $(12,067) $(99) $25 $ 430 $(12,042)Adjustments to reconcile net income to net cash

provided by operating activities:

Net (appreciation) decline in fair value of investments (2,481) (2,160) (26) (3) (2,507) (2,163)

Net gain of plans pending termination and trusteeship 46 (84) 0 0 46 (84)

Losses on completed and probable terminations 3,954 14,707 0 0 3,954 14,707

Actuarial charges 490 1,787 0 1 490 1,788

Benefit payments - trusteed plans (3,301) (2,888) (1) (1) (3,302) (2,889)

Settlements and judgments (5) (7) 0 0 (5) (7)

Cash received from plans upon trusteeship 218 51 0 0 218 51

Receipts from sponsors/non-sponsors 216 84 0 0 216 84

Amortization of discounts/premiums 128 128 11 11 139 139 Changes in assets and liabilities, net of effects

of trusteed and pending plans:

(Increase) decrease in receivables 31 (311) 0 3 31 (308)

Increase in present value of nonrecoverable

future financial assistance 190 45 190 45

Increase (decrease) in unearned premiums (13) 16 0 0 (13) 16

Increase (decrease) in accounts payable (1) 12 0 0 (1) 12

Net cash provided (used) by operating activities $ (189) $ (732) $ 75 $81 $ (114) $ (651)

48

Note 14 -- Litigation

PBGC was involved in numerous litigation matters in 2005. At the end of the fiscal year, PBGC had

383 open, active bankruptcy cases and 45 active litigation matters (other than in bankruptcy court). PBGC

records as a liability on its financial statements an estimated cost for unresolved litigation to the extent that

losses in such cases are probable and estimable in amount. PBGC estimates that possible losses of up to

$180 million (due primarily to new issues in active litigation) could be incurred in the event that PBGC

does not prevail in these matters. These possible losses are not recognized in the financial statements.

Note 15 -- Subsequent Events

Changed business and financial conditions subsequent to September 30, 2005, will result in the

PBGC adding plans to its probable or terminated inventory in the single-employer program in FY 2006.

If these changed business and financial conditions had occurred prior to FY 2005 year-end, PBGC’s

financial statements would have reflected a decrease of $2.9 billion in Net income and a decrease in the

Net position in the same amount.

There was no subsequent event to report on the multiemployer program.

49

ACTUARIAL VALUATION

PBGC calculated and validated the present value of future PBGC-payable benefits (PVFB) for both

the single-employer and multiemployer programs and of nonrecoverable future financial assistance under

the multiemployer program. Methods and procedures for both single-employer and multiemployer plans

were generally the same as those used in 2004.

PRESENT VALUE OF FUTURE BENEFITS AND NONRECOVERABLE FINANCIAL ASSISTANCE - 2005Number of Number of

Plans Participants Liability(in thousands) (in millions)

I. SINGLE-EMPLOYER PROGRAMA. Terminated plans

1. Seriatim at fiscal year-end (FYE) 3,109 448 $14,521 2. Seriatim at DOPT, adjusted to FYE 66 47 2,334 3. Nonseriatim1 410 679 45,751 4. Rettig Settlement (seriatim)2 * 1 5. Missing Participants Program (seriatim)3 19 42

Subtotal 3,585 1,193 62,649

B. Probable terminations (nonseriatim)4 44 222 23,918Total 5 3,629 1,415 $86,567

II. MULTIEMPLOYER PROGRAMA. Pre-MPPAA terminations (seriatim) 10 * $ 2B. Post-MPPAA liability (net of plan assets) 77 103 1,485

Total 87 103 $1,487

* Fewer than 500 participants

Notes:

1) The liability for terminated plans has been increased by $58 million for settlements.

2) The Rettig Settlement refers to the liability that PBGC incurred due to the settlement of a class action lawsuit that increased benefits for some participantsand provided new benefits to others. The remaining participants not yet paid are valued seriatim.

3) The Missing Participants Program refers to a liability that PBGC assumed for unlocated participants in standard plan terminations.

4) The net claims for probable plans reported in the financial statements include $137 million for not-yet-identified probable terminations. The assets for theprobable plans, including the expected value of recoveries on employer liability and due-and-unpaid employer contributions claims, are $13,448 million. Thus, the net claims for probable terminations as reported in the financial statements are $23,918 million less $13,448 million, or $10,470 million.

5) The PVFB in the financial statements ($69,737 million) is net of estimated plan assets and recoveries on probable terminations ($13,448 million), estimatedrecoveries on terminated plans ($343 million), and estimated assets for plans pending trusteeship ($3,039 million), or, $86,567 million less $13,448 millionless $343 million less $3,039 million = $69,737 million.

50

SINGLE-EMPLOYER PROGRAM

PBGC calculated the single-employer program’s liability for benefits in the terminated plans and

probable terminations, as defined in Note 2 to the financial statements, using a combination of two

methods: seriatim and nonseriatim. For 3,109 plans, representing about 87% of the total number of

single-employer terminated plans (38% of the total participants in single-employer terminated plans),

PBGC had sufficiently accurate data to calculate the liability separately for each participant’s benefit - the

seriatim method. This was an increase of 157 plans over the 2,952 plans valued seriatim last year. For 66

plans whose data were not yet fully automated, PBGC calculated the benefits and liability seriatim as of

the date of plan termination (DOPT) and brought the total amounts forward to the end of fiscal year

2005.

For 410 other terminated plans, PBGC did not have sufficiently accurate or complete data to

value individual benefits. Instead, the Corporation used a "nonseriatim" method that brought the

liabilities from the plan’s most recent actuarial valuation forward to the end of fiscal year 2005 using

certain assumptions and adjustment factors.

For the actuarial valuation, PBGC used a select and ultimate interest rate assumption of 5.2% for

the first 25 years after the valuation date and 4.5% thereafter. The mortality table used for valuing

healthy lives was the 1994 Group Annuity Mortality Static Table (with margins), set forward one year,

projected 22 years to 2016 using Scale AA (compared to the 1994 Group Annuity Mortality Static Table

(with margins) , set forward one year, projected 20 years to 2014 using Scale AA used in the September

30, 2004 valuation). The projection period is determined as the sum of the elapsed time from the date of

the table (1994) to the valuation date plus the period of time from the valuation date to the average date

of payment of future benefits. PBGC assumed an explicit loading for expenses in all terminated plans

and single-employer probable terminations. The reserve for expenses in the 2005 valuation was assumed

to be 1.18% of the liability for benefits plus additional reserves for cases whose plan asset

determinations, participant database audits, and actuarial valuations were not yet complete. The factors

to determine the additional reserves were based on case size, number of participants, and time since

trusteeship.

51

For non-pay-status participants, PBGC used expected retirement ages, as explained in subpart B

of the Allocation of Assets in Single-Employer Plans regulation. PBGC assumed that participants who

had attained their expected retirement age were in pay status. In seriatim plans, for participants who

were older than their plan’s normal retirement age, were not in pay status, and were unlocated at the

valuation date, PBGC reduced the value of their future benefits to zero over the three years succeeding

normal retirement age to reflect the lower likelihood of payment.

MULTIEMPLOYER PROGRAM

PBGC calculated the liability for the 10 pre-MPPAA terminations using the same assumptions

and methods applied to the single-employer program.

PBGC based its valuation of the post-MPPAA liability for nonrecoverable future financial

assistance on the most recent available actuarial reports, Form 5500 Schedule B’s, and information

provided by representatives of the affected plans. The Corporation expected 77 plans to need financial

assistance because severe industrial declines have left them with inadequate contribution bases and they

had insufficient assets for current payments or were expected to run out of assets in the foreseeable

future.

STATEMENT OF ACTUARIAL OPINION

This valuation has been prepared in accordance with generally accepted actuarial principles and

practices and, to the best of my knowledge, fairly reflects the actuarial present value of the Corporation’s

liabilities for the single-employer and multiemployer plan insurance programs as of September 30, 2005.

In preparing this valuation, I have relied upon information provided to me regarding plan

provisions, plan participants, plan assets, and other matters, some of which are detailed in a complete

Actuarial Report available from PBGC.

52

In my opinion, (1) the techniques and methodology used for valuing these liabilities are generally

acceptable within the actuarial profession; (2) the assumptions used are appropriate for the purposes of

this statement and are individually my best estimate of expected future experience discounted using

current settlement rates from insurance companies; and (3) the resulting total liability represents my best

estimate of anticipated experience under these programs.

Joan M. Weiss, FSA, EAChief Valuation Actuary, PBGCMember, American Academy of Actuaries

A co mplete actu arial valua tion report, includ ing addition al actua rial data ta bles, is available from PB GC upon request.

Pension Benefit Guaranty Corporation Office of Inspector General

1200 K Street, N.W., Washington, D.C. 20005-4026

To the Board of Directors Pension Benefit Guaranty Corporation We contracted with Clifton Gunderson LLP, an independent certified public accounting firm, to audit the financial statements of the Single-Employer and Multiemployer Program Funds administered by the Pension Benefit Guaranty Corporation (PBGC) as of September 30, 2005. The audit was performed in accordance with auditing standards generally accepted in the United States of America, Government Auditing Standards issued by the Comptroller General of the United States, and the GAO/PCIE Financial Audit Manual. Clifton Gunderson’s financial statement audit of PBGC’s Single-Employer and Multiemployer Program Funds found:

• The financial statements are presented fairly, in all material respects, in conformity with accounting principles generally accepted in the United States of America;

• PBGC’s assertion about internal control over financial reporting and compliance

with laws and regulations is fairly stated in all material respects;

• Four reportable conditions, including three repeated from Fiscal Year 2004: financial management systems integration, information security, and single-employer premiums; and a new reportable condition: preparedness for unanticipated incidences and disruptions;

• No instances of noncompliance with tested laws and regulations.

Clifton Gunderson is responsible for the accompanying auditor’s report dated November 9, 2005, and the conclusions expressed in the report. We do not express opinions on PBGC’s financial statements or internal control, nor do we draw conclusions on compliance with laws and regulations. Clifton Gunderson’s reports (2006-1/FA-0014-1) are available on our website at http://oig.pbgc.gov. The financial statements of the Single-Employer and Multiemployer Program Funds administered by PBGC as of September 30, 2004 were audited by other auditors whose report dated November 12, 2004 expressed an unqualified opinion on those financial statements. Their reports (2005-2/23182-2) are also available on our website. Sincerely, Robert L. Emmons Inspector General November 9, 2005

Centerpark I 4041 Powder Mill Road, Suite 410 Calverton, Maryland 20705-3106

tel: 301-931-2050 fax: 301-931-1710

www.cliftoncpa.com Offices in 14 states and Washington, DC h

a1 Independent Auditor’s Report

To the Inspector General of the Pension Benefit Guaranty Corporation We have audited the accompanying statements of financial condition of the Single-Employer and Multiemployer Program Funds administered by the Pension Benefit Guaranty Corporation (PBGC) as of September 30, 2005, and the related statements of operations and changes in net position and cash flows for the year then ended. These financial statements are the responsibility of PBGC’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Single-Employer and Multiemployer Program Funds administered by the PBGC as of September 30, 2004 were audited by other auditors whose report dated November 12, 2004, expressed an unqualified opinion on those financial statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government

Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the fiscal year 2005 financial statements referred to above present fairly, in all material respects, the financial position of the Single-Employer and Multiemployer Program Funds administered by PBGC as of September 30, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. By law, PBGC’s Single-Employer and Multiemployer Program Funds must be self-sustaining. As of September 30, 2005, PBGC reported in its financial statements net deficit positions (liabilities in excess of assets) in the Single-Employer and Multiemployer Program Funds of $22,776 million and $335 million, respectively. As discussed in Note 7 to the financial

Page 2 of 2

statements, losses as of September 30, 2005 for the Single-Employer and Multiemployer Programs that are reasonably possible as a result of unfunded vested benefits are estimated to be $108,000 million and $418 million, respectively. In addition, as discussed in Note 15 to the financial statements, subsequent to September 30, 2005, business and financial conditions significantly deteriorated for a sponsor of two large single-employer plans that may terminate. Had these plan sponsor events occurred prior to September 30, 2005, PBGC’s Single-Employer Program net deficit would have increased by $2,900 million. The PBGC’s net deficit, and long-term viability, could be further impacted by losses from plans classified as reasonably possible (or from other plans not yet identified as potential losses) as a result of deteriorating economic conditions, the insolvency of a large plan sponsor or other factors. PBGC has been able to meet their short-term benefit obligations. However, as discussed in Note 1 to the financial statements, management believes that neither program at present has the resources to fully satisfy PBGC’s long-term obligations to plan participants. In accordance with Government Auditing Standards, we have also issued our reports dated November 9, 2005 on our consideration of PBGC’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws and regulations and other matters. Those reports are an integral part of an audit performed in accordance with Government Auditing

Standards and should be considered in assessing the results of our audit. The financial statement highlights, management’s discussion and analysis, actuarial valuation, annual performance report, and financial summary contain a wide range of data, some of which is not directly related to the financial statements. We do not express an opinion on this information. However, we compared this information for consistency with the financial statements and discussed the methods of measurement and presentation with PBGC officials. Based on this limited work, we found no material inconsistencies with the financial statements.

a1 Calverton, Maryland November 9, 2005

56

ANNUAL PERFORMANCE REPORT

PBGC’s strategic plan for fiscal years 2005-2008 reflects the Corporation’s commitment to

safeguarding the interests of the federal pension insurance system, sharpening its focus as a

customer-centric organization, and efficiently and cost-effectively administering the federal pension

insurance programs. Specifically, the PBGC goals are to:

1) safeguard the federal pension insurance system for the benefit of participants, plan sponsors,

and other stakeholders;

2) provide exceptional service to customers and stakeholders; and

3) exercise effective and efficient stewardship of PBGC resources

In carrying out its mission, PBGC interacts with a variety of customers and stakeholders with an

interest in the pension insurance programs, including beneficiaries in terminated pension plans,

participants in ongoing pension plans that PBGC insures, the employers that pay premiums, the

lawmakers and policymakers who oversee the federal insurance programs, and the public that has

an interest in a strong and effective pension system.

PBGC’s performance measures track and gauge customer service accomplishments, success at

managing and mitigating risk exposure, and the efficiency with which the agency administers the

insurance programs. PBGC measures customer satisfaction through all modes of contact,

including its Web site. This is important because several business transactions with customers are

now performed through the Web, and these will be expanded in the future.

PBGC’s strategic plan may be found on PBGC’s Web site at www.pbgc.gov/about/stratplan.htm.

The following table shows the results achieved in 2005. This meets the annual reporting requirement

of the Government Performance and Results Act.

572005 PBGC Corporate Performance Measures

Measures 2005 Target 2005 Result Baseline

Results

Goal 1: Safeguard the federal pension insurance system for the benefit of participants, plan sponsors, andother stakeholders

! Promote better funding of

insured plans by monitoringunfunded benefit liabilities in

insured plans and supportingpension reform legislation

- Refer to note a below

! Promoted the Administration’s pension reform proposals

through testimony, speeches, interviews, news releases andstatements. The reform proposals were included in the

Administration FY 2006 budget request to Congress.! Expanded capacity to monitor underfunded plans and

respond to risks by developing new models to quantify risks,establishing an Office of Risk Assessment, and increasing

financial analysis, negotiation and litigation resources.

Goal 2: Provide exceptional service to customers and stakeholders

! American Customer

Satisfaction Index of retirees whoreceive benefits from PBGC

84 85 84 (2004)

! American Customer

Satisfaction Index of participantswho contact PBGC for service

78 79 73 (2001)

! American Customer

Satisfaction Index of participantswho visit the PBGC Web site

63 65 60 (2004)

! American Customer

Satisfaction Index of pensionpractitioners who contact PBGC

for service

72 68 69 (2002)

! American CustomerSatisfaction Index of pension

practitioners who visit the PBGCWeb site

74 66 72 (2004)

Goal 3: Exercise efficient and effective stewardship of PBGC resources

! Administrative cost perparticipant in ongoing plans

insured by PBGC - Refer to note band c below

$1.89

$1.89 $1.55 (2004)

! Administrative cost perparticipant in plans PBGC trustees

- Refer to note c below

$194 $194 $219 (2004)

a By its n ature, this m easure does not lend itself to setting an nual targ ets or m ilestones. PB GC is working to develop new mea sures tha t better reflect results

asso ciated with this goal.

b This measure was developed in 2003 and was reported in PBGC’s FY 2004 Annual Performance Report to reflect the cost efficiency of the underwriting,

monitoring, and risk mitigation activities relating to insured plans. In FY 2004 and 2005, airl ines with over $25 bil lion in additional pension underfunding

filed for Chapter 11 b ankrup tcy, significantly increasing the risk facing the pension insurance prog ram an d the resources necessary to respo nd to tho se risks,

affecting the measure in ways it was not initially designed to capture. For continuity and comparison purposes, this measure has been included for FY 2005;

however, PBGC is working to develop new measures that better reflect the risk based drivers associated with its expenditures needed to monitor, respond to,

and mitigate risks to the pension insurance program.

c Data so urces for the two m easures are the funding am ounts bu dgeted for pen sion insurance an d adm inistering plan terminations, divided by th e num bers

for participants in ongo ing plans and trusteed plans respectively. The 2004 baseline results have been restated to reflect a reclassification of some plan

term ina tion activ ities to p ension in surance activ ities.

58ACHIEVING PERFORMANCE TARGETS

Safeguard the Pension Insurance System for the Benefit of Participants, Plan Sponsors, andother Stakeholders

Financial and operational risks facing the pension insurance system increased significantly in 2005.

Since 2002, underfunding in financially weak companies (reasonably possible exposure) increased

three-fold. In 2005, PBGC saw a 27 percent increase in unfunded benefit liabilities reported in

Section 4010 filings during 2005. The number of missed funding contributions exceeding $1

million more than doubled from 25 in FY 2004 to 55 in FY 2005. PBGC also faced a record

number of bankruptcies which significantly increased the number of controlled groups now

monitored. Overall PBGC is monitoring 1,987 controlled groups with 4,152 pension plans where

the financial condition of the plan sponsor poses a potential risk to the pension insurance system.

The Corporation also undertook a substantial amount of litigation involving the largest pension

default in the agency’s history, in addition to managing more than 350 active bankruptcy cases.

While the funding levels for insured plans are largely outside of PBGC’s control, the Corporation

undertook several steps to improve its ability to monitor and respond to risks facing the insurance

programs, including developing new models to quantify program risks, and establishing an Office of

Risk Assessment. Early investigations, negotiations, and litigation, form the core of PBGC’s

response to the broader solvency issues impacting the pension insurance program.

PBGC actively promoted comprehensive reform of the pension insurance system to address system

underfunding through congressional testimony, news releases and statements, speeches and

interviews. PBGC continues to make the case for new rules to ensure that pension plans are better

funded and that the pension insurance system remains viable over the long-term. During 2005, the

PBGC remained visible as an advocate for the Administration’s proposals to improve liability

measures, enhance disclosure, and strengthen safeguards against underfunding.

Provide Exceptional Service to Customers and Stakeholders

PBGC uses the American Customer Satisfaction Index (ACSI), a national indicator of customer

satisfaction, to measure whether customer expectations are being met and to identify the impact of

service elements on customer satisfaction. PBGC obtains ACSI scores for three primary customer

groups—pension practitioners, plan participants, and those accessing the PBGC Web site.

59

! The 2005 ACSI index for pension practitioners dropped to 68, one point less than the

previous index of 69 sustained from 2002-2004, and lower than the 2004 composite

satisfaction index of 72 for all participating federal agencies. ACSI results for 2005 show

improvements in customer care, and timeliness and accuracy of refunds of premium

overpayments.

! The 2005 ACSI index for participants who contacted the PBGC Customer Contact Center

was 79. This was one point higher than the target of 78 and considerably higher than the

2004 composite satisfaction index of 72 for all participating federal agencies. For retirees

who are currently receiving benefits from PBGC, the 2005 ACSI index was 85, one point

higher than the target of 84. This was the highest score among the federal agencies that

provide benefits to the American public and thirteen points higher than the federal average of

72.

! The 2005 ACSI index for pension practitioners who visited PBGC’s Web site dropped to 66,

six points less than the 2004 baseline score of 72 and eight points less than the target of 74.

Some of the reduction may be attributable to the fact that PBGC launched a new Web site to

which customers were still becoming oriented. The PBGC expects that its new Web site,

with its better organization and greater ease of navigation, will result in improved scores over

time. In addition, PBGC made substantial improvements to its online services in 2005. For

example, online filing of premium payments through the self-service system called My Plan

Administration Account (My PAA), and electronic filing of financial information are now

available. Efforts are also underway to improve the premium accounting system which is a

key system to support practitioner online customer service related activities.

! The 2005 ACSI index for participants visiting the Web site was 65, five points higher than

the 2004 baseline score of 60. This exceeded the target of 63. During 2005, PBGC

expanded online business transactions for participants. In addition to making address

changes and requesting electronic funds deposit, participants who access their benefit

accounts electronically through the Web-based My Pension Benefit Account (My PBA) can

now apply for benefits, designate a beneficiary and submit a request for a benefit estimate.

60

Exercise efficient and effective stewardship of PBGC resources

Achieving the Corporation’s performance goals requires effective management of

resources–financial, human capital, and information technology. PBGC continued to maintain a

cost-efficient operation with an administrative cost per participant in trusteed plans at $194.

President’s Management Agenda

The President’s Management Agenda (PMA) focuses on five areas to promote a customer-

centric, results-oriented federal government. PBGC met this challenge in 2005 by:

! Strategic Management of Human Capital: PBGC continued to implement its Human Capital

Strategic Plan, taking steps to enhance its ability to recruit and retain top talent and close

critical competency gaps. These included establishing the Corporate Outreach Recruitment

Team and a Career Intern Program. PBGC has now addressed four of five core competency

gaps through highly focused internal training programs: Contract Management, Project

Management, Data Management, and a “Big Picture” perspective of the agency’s mission,

operations and environment. The first 30 employees completed the two-year Project

Management Core Curriculum Program in 2005, with 81 percent of program participants

achieving Project Management Professional certification this year. The fifth competency

gap, Information Technology, will be addressed in 2007.

In promoting a performance-based culture, PBGC was among the first federal agencies to

begin aligning performance expectations with organizational goals, and was given full

certification by the Office of Personnel Management for its executive performance system.

PBGC also conducted the Gallup Q12 Survey early in 2005 to assess the level of employee

engagement. PBGC’s results were in the 61st percentile of the U.S. overall working

population. Employees and managers worked together to implement Impact Plans, which are

specific roadmaps to improving engagement in the workplace.

PBGC continued to build its program of professional employee development through

enhanced succession planning and expanded mentoring programs. The Leaders Growing

Leaders program entered its third two-year cycle in 2005.

61

Finally, PBGC effectively leveraged technology to improve management of its personnel,

harnessing business intelligence tools for workforce analysis, forecasting and trends.

• Competitive Sourcing: As a Government Corporation, PBGC is not subject to the FAIR Act

competitive sourcing process. For many years PBGC has been a government leader in

outsourcing certain of its services making use of an internal process to evaluate whether

workload requirements are best addressed via Federal staff or contract support. PBGC uses

many private sector entities for a wide variety of functions, including a number of benefit

payment and benefits administration services, information technology, actuarial services,

money management, office space, legal services, financial advisory services, etc. PBGC’s

commitment towards a competitive based work environment has resulted in approximately

two-thirds of PBGC’s administrative budget being in the form of procurements along with

outsourced services employing some 1,400 contract staff to supplement PBGC’s 851 Federal

staff.

• Improved Financial Management: PBGC’s management internal controls program was

strengthened through the establishment of an Internal Controls Committee to oversee the

effectiveness of key management controls, which are tested for design and operating

effectiveness. Testing is conducted to strengthen the supporting evidence for the PBGC

FMFIA assurance statement. PBGC also completed the 2005 Performance and

Accountability Report in 45 days for the second consecutive year.

• Expanded Electronic Government: PBGC made significant improvements to its Web site and

expanded Web-based services available for pension plan administrators and trusteed plan

participants. The redesigned Web site, www.pbgc.gov, significantly improves site

navigation, enabling users to quickly find information and guidance related to PBGC.

Plan administrators can now file financial information electronically through PBGC e-4010

application and file premium payments electronically, improving data accuracy and reducing

filing preparation.

Participants in trusteed plans can now apply for benefits, designate a beneficiary, and submit

a request for a benefit estimate, in addition to making address changes and requesting

electronic funds deposit. Plan level information for trusteed plans has also now been made

available to trusteed participants.

62

• Budget and Performance Integration: PBGC modified its strategic planning and budget

process to ensure alignment with the Corporation’s strategic direction, and to identify new

outcome goals and objectives. These goals and objectives address the challenges PBGC

now faces and those anticipated in the future. The Performance Budget for 2007 includes

the modified goals and objectives.

PROGRAM EVALUATION

! PBGC annually evaluates the satisfaction of participants in plans trusteed by PBGC and of

pension practitioners. The American Customer Satisfaction Index provides a means to

compare PBGC’s results with those of other government and private organizations.

Evaluation of the survey responses results in service innovations and process improvements

that benefit PBGC customers.

! PBGC had its first Program Assessment Rating Tool (PART) review by the Office of

Management and Budget (OMB) in 2004. OMB rated PBGC’s program as “moderately

effective” overall with a score of 79. PBGC received scores of 80 or higher, “fully

effective”, for the three assessed areas of Program Purpose and Design, Strategic Planning,

and Program Management.

The Program Results/Accountability area scored 75. OMB’s PART analysis reflected its

view that PBGC performed well in areas that are under PBGC’s statutory control, but that a

rating of “effective” was not possible for the Program Results/Accountability area unless and

until the statutory mandate under which PBGC operates is modified to strengthen pension

plan funding rules and the premium structure is altered to more accurately reflect the risks

posed by individual plans. Nonetheless PBGC is working to improve Program

Results/Accountability which focuses on financial conditions of the pension system. PBGC

worked closely with the Department of Labor (DOL), Department of Treasury and other

executive branch agencies promoting comprehensive pension reform. The proposed reforms

which strengthen plan funding rules, enhance transparency of plan information, and reform

the premium structure for defined benefit plans. Comprehensive pension reform was

included in the President’s FY 2006 Budget to Congress. In response to a GAO report in

June 2005, PBGC is continuing to work with DOL and IRS to collect pension plan

information more efficiently. PBGC continues to aggressively explore opportunities to

strengthen its pension plan monitoring and encourage better funding of the defined benefit

system.

63

FINANCIAL SUMMARY

Single-Employer Program

Fiscal Year Ended September 30,

(Dollars in millions) 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

Sum ma ry of Operation s:

Premium income $ 1,451 1,458 948 787 821 807 902 966 1,067 1,146

Other income $ 44 24 28 28 23 5 3 10 19 26

Investmen t income (loss) $ 3,897 3,197 3,349 170 (843) 2,392 728 2,118 2,687 915

Actuarial charges and adjustments (credits) $ 490 1,787 6,161 2,802 1,082 453 (602) 815 488 632

Losses (c redits) f rom com pleted and pro bab le

terminations $ 3,954 14,707 5,377 9,313 705 (80) 49 584 489 118

Adm inistrative and inv estment expen ses $ 342 288 290 225 184 167 161 158 155 150

Other expenses $ 77 (36) 97 15 2 (2) (1) 6 29 3

Net incom e (loss) $ 529 (12,067) (7,600) (11,370) (1,972) 2,666 2,026 1,531 2,612 1,184

Summary of F inancial P osition:

Cash and investm ents $ 54,387 36,254 33,215 24,851 21,010 20,409 17,965 17,345 14,988 11,665

Total assets $ 56,470 38,993 34,016 25,430 21,768 20,830 18,431 17,631 15,314 12,043

Presen t value o f future ben efits $ 69,737 60,836 44,641 28,619 13,497 10,631 11,073 12,281 11,497 10,760

Net Position $ (22,776) (23,305) (11,238) (3,638) 7,732 9,704 7,038 5,012 3,481 869

Insu rance A ctiv ity:

Ben efits pa id $ 3,685 3,006 2,488 1,537 1,043 902 901 847 823 790

Participants receiving mo nthly benefits

at end of year 682,540 517,900 458,800 344,310 268,090 226,080 214,160 208,450 204,800 198,600

Plans trusteed and pending

trus teeship by PBGC 3,585 3,469 3,277 3,122 2,965 2,864 2,775 2,655 2,500 2,338

64

FINANCIAL SUMMARY

Multiemployer Program

Fiscal Year Ended September 30,

(Dollars in millions) 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

Sum ma ry of Operation s:

Premium Income $ 26 27 25 25 24 24 23 23 23 22

Other income $ 0 0 0 0 0 0 0 0 0 1

Investmen t income (loss) $ 79 54 37 118 95 70 (56) 133 68 12

Actuarial charges and adjustments (credits) $ 0 1 1 0 1 0 0 0 (1) 1

Losses (gains) from financial assistance $ 204 55 480 101 269 26 109 34 (3) 102

Adm inistrative and inv estment expen ses $ 0 0 0 0 0 0 0 0 0 0

Net incom e (loss) $ (99) 25 (419) 42 (151) 68 (142) 122 95 (68)

Summary of F inancial P osition:

Cash and investm ents $ 1,147 1,057 984 933 796 682 681 736 585 498

Total Assets $ 1,160 1,070 1,000 944 807 694 692 745 596 505

Presen t value o f future ben efits $ 2 3 3 3 4 4 5 6 7 9

Non recoverable future financial

assistance, present value $ 1,485 1,295 1,250 775 679 414 479 389 361 365

Net position $ (335) (236) (261) 158 116 267 199 341 219 124

Insurance Activity:

Ben efits pa id $ 1 1 1 1 1 1 1 1 1 2

Participan ts receiving m onth ly benefits

from PBG C at end of year 280 320 390 460 510 620 730 850 1,000 1,100

Plan s receiv ing f inan cial

assistance from PBGC 29 27 24 23 22 21 21 18 14 12